Pensions  

A possible alternative to lifestyling?

This article is part of
Guide to using Target Date Funds

A possible alternative to lifestyling?

Target Date Funds (TDFs) are a relative newcomer on the pensions block and have been promoted as a possible alternative to lifestyling, which is the prevalent way of managing defined contribution (DC) pension assets.

But they have taken a while to take off, partly because lifestyling is so prevalent - dominating around 94 per cent of all DC assets - and has been relatively successful.

But TDFs' adherents sing its praises and claim many advantages over lifestyling so that new players on the pension scene, especially master trusts, that have a clean slate, are resorting to TDFs as a relatively easy and less complex way to manage the pension assets.

TDFs are single funds, usually based on a fund-of-fund or multi-asset structure, and with a fund manager running it with an end point in mind. So each fund will have the 'target' retirement date in mind, usually in batches of five years, depending on when the individual is planning to retire.

Conventionally there used to be a fund for each retirement date, but with the advent of pension freedoms, and the flexibility demanded by pensioners, this is more often now done every five years.

Laith Khalaf, senior analyst at Hargreaves Lansdown, says: "The idea is that you start off when you're younger, and you will start off with a higher risk portfolio and as you get older you will get less risk to when it reaches a point where it's the same all the way.

"I think the problem is life isn't that simple - people's needs change and fund management companies change and if you're taking a 30-year time horizon, there's going to be an awful lot of change."

Selling point

TDFs' proponents say that their big selling point is that the pension assets sit under one umbrella, so that as the policyholders in each cohort near retirement, it is easy for the fund manager to switch the allocation into a more suitable fund.

With lifestyling, which is the process used by the vast majority of DC schemes, the policyholder is in several different funds and the administrator has to seek permission if the saver wants to change allocation.

Will Allport, senior retirement strategist at Vanguard, explains: "The administration in any defined contribution scheme is very complex and very costly. The administrator moves their allocation around on the individual's behalf."

Say, for example, at the age of 50, an individual is 60 per cent invested in a global equity fund, 20 per cent in UK equity and 20 per cent in a bond fund. He says: "In lifestyling the administrator sees them having three lines in their account. 

"In lifestyling the administrator will see when you are 51, I'm going to transfer your allocation, with 58 per in global equities and 18 per cent in UK equities, and 24 per cent in bonds. It's a complex transaction for the individual - the administrator is moving the account around.