A lifestyling alternative to Target Date funds

Switches happen automatically with a lifestyling approach, so regular pension savings reviews can focus on whether the lifestyling option chosen is still appropriate.

Without lifestyling your clients would need to make changes, as they thought appropriate, to their investment choice as they approached their retirement age.

Depending on the lifestyling option, Stan Russell, retirement income expert at Prudential, says your savings may be moved into an investment type, such as gilts, that has a closer relationship to how a pension income is calculated.

Therefore, if the value of that type of fund goes down, the cost of providing a pension income could also be expected to reduce.

If on the other hand, the cost of buying a pension increases, then that fund would also be expected to increase in value as well.

When you take your benefits, current tax rules allow you to usually take up to 25 per cent of your pension savings as a tax-free cash sum.

To help make the amount of that lump sum more predictable for you, Mr Russell says the lifestyling process may move part of your money as you approach retirement into a cash or deposit fund and protect it from falls just before you retire.

However Mr Russell notes the design of the lifestyle option is based on a provider’s long-term expectations of how funds might perform.

As it is a fixed strategy, he warns it does not take account of changes in economic or market conditions that might occur in the future.

For instance, your client may find that funds do not keep pace with inflation or the automatic switches of your pension savings between funds happen at times that may not prove to be the best for you.

As a result, with lifestyling Mr Russell points out your savings may be moving into a fund, or funds, that could prove to be a poorer investment option than your current fund or funds.

Your savings, depending on your lifestyling option, may also be moved into a fund that is closely linked to pension income rates (or annuity rates) at the time when these rates are not at levels that meet your needs, he adds.

The available lifestyling option may not exactly match your needs, he adds.

For example, it may be designed to help match to pension income rates - or to help make a possible lump sum at retirement more predictable.

Mr Russell notes you may not be saving towards those aims in the same proportions that the lifestyling option is aiming to deliver.

He says: “Lifestyling works towards your originally planned retirement age. If you decide to take your benefits before or after that age then lifestyling is not working towards your actual retirement date, as funds may not be switched at the right time.

“Lifestyling is designed to suit the needs of most people saving for their retirement and so might not be suitable for your particular needs or attitude to the risk you are prepared to take and return you expect.

“Your personal circumstances may change (for example: marriage, divorce, inheritance) and so your lifestyle option may no longer be right for you.”

In traditional lifestyling, Andy Legon, media manager at the National Employment Savings Trust, says greater costs will only be avoided through luck rather than planning.

He says: “The operational ease of target date funds significantly reduces the risk of record keeping errors in relation to this rebalancing.

“Target date fund structures can also readily accommodate strategic asset allocation changes. This is where the mix and proportion of assets are chosen in order to meet a long-term investment objective.

“We argue that this isn’t about schemes pretending they can see the future. This is about having a structure that lends itself to looking for rewarded risk over long-term time horizons and making considered, strategic adjustments to meet a stated objective.”

For scheme administrators, Steve Charlton, defined contribution proposition manager for Vanguard in Europe, says managing investment into one fund for multiple members is far simpler than managing investment in to multiple funds for each investor as they might currently be doing for a lifestyle programme.

Mr Charlton says ultimately there are very few drawbacks to target date funds as they can be designed to meet the needs of most investors, irrespective of retirement plans or needs.

In terms of selection performance of target date funds is easy to analyse as each fund will have a performance figure that it achieves, says Mr Charlton.

He says this makes looking at each fund in isolation uncomplicated and comparison across different provider’s funds just as easy to complete.

By comparison, Mr Charlton says a lifestyle approach, being made up of a collection of different funds within a matrix that will be different for each member, has always been incredibly complicated to analyse and few members, employers or trustees will know what their rate of return actually is.

He says as a lifestyle approach will differ across schemes, no comparison would be entirely accurate.