Aegon has launched a new range of default fund options for workplace pension schemes, set to be available from February 2016.
At the heart of the Workplace Target range are five funds which use the providers’ Flexible Target glidepath, designed to keep investors’ options open as they near retirement.
This approach aims to reduce risk, while maintaining diversification, in the final six years before retirement, to cushion retiring investors from the worst consequences of a market fall and retain some growth potential.
The range offers three retirement target approaches – Flexible Target, Annuity Target and Cash Target – which reflect the mix of retirement income options open to savers in the wake of April’s pension freedoms.
The Flexible Target approach moves assets into a cautious multi-asset mix as investors approach retirement, with approximately 26 per cent equity, 49 per cent fixed interest, and 25 per cent cash on retirement.
This approach offers a suitable risk/return profile for investors who opt for drawdown or change their retirement date. As such, Aegon argued that it better serves the needs of a ‘typical’ default investor following pension freedoms.
The Annuity Target strategy is designed for schemes which believe most employees will buy an annuity on retirement, moving savers into 75 per cent long-dated gilts and 25 per cent cash on retirement.
Finally, the Cash Target strategy is designed for savers who plan to cash-in their savings on retirement. This is aimed at schemes where most members have very small pots, or are likely to use other sources to create their retirement income – for example those who also have defined benefit pension income.
Nick Dixon, investment director at Aegon, pointed to National Association of Pension Funds’ data showing that auto-enrolment means that 80 per cent of workers now view their workplace pension as their main method of saving.
“As around 72 per cent stay in their scheme’s default fund, we must offer high-quality investments for those who don’t make active investment decisions.”
A YouGov poll of 200 advisers, commissioned by Aegon last October, found that within five years, advisers estimate only a quarter of people will look to purchase an annuity at retirement.
Mr Dixon commented that the dramatic shift in investor behaviour means traditional lifestyle funds which target an annuity by moving into long gilts no longer serve ‘typical’ workplace investors.
“Risk reduction using a diversified investment strategy tends to offer better returns for less risk, especially where investors delay or phase into retirement, and where they choose drawdown.”
Mel Kenny, a Chartered financial planner at Radcliffe & Newlands, commented that the new options “keep things simple whilst acknowledging the different pension pot requirements of different groups of people approaching retirement”.
Dalbeath Financial Planning owner and IFA Matthew Harris said it looks like sensible idea, but the devil will be in the detail.
“For example, what will the asset allocation be in the years before lifestyling starts and what will the charges be? There is also an issue of whether many people will know, 10 or 20 years before retirement, whether they want to be in the annuity group of the flexible group.
“But in general, we applaud Aegon for trying to give employees more choice over their retirement outcomes.”
peter.walker@ft.com
