Warning about inappropriate lifestyle default funds

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Warning about inappropriate lifestyle default funds

The majority of the defined contribution (DC) schemes default funds are lifestyled which may not be the most appropriate investment strategy for everyone, the Pensions Policy Institute (PPI) has warned.

The third edition of the report The Future Book: unravelling workplace pensions, commissioned by Columbia Threadneedle Investments, showed that 99.7 per cent of master trust members are in a default fund.

The value is similar for group personal pension (GPP), with 94 per cent.

Daniela Silcock, head of policy research at the PPI, said the majority of default funds in master trust and GPP schemes are lifestyled.

She said: “Some of those planning to continue investing their savings after retirement might benefit more from a fund which prioritises growth even in later years.

“A lifestyle fund is likely to meet the needs of those who plan to convert their savings into an income at retirement through, for example, an annuity.”

This is a matter of concern Financial Conduct Authority (FCA), which has told providers and advisers to review the appropriateness of lifestyle investment strategies.

Historically, many pension lifestyle investment strategies were designed to target an asset mix immediately before a customer’s nominated retirement date to broadly match the tax-free cash and annuity purchase most customers made.

Following the 2015 pension reforms, with fewer customers choosing to buy annuities, the regulator wanted to see providers changing their strategies to reflect these investment profiles no longer being appropriate for many customers.

Nevertheless, there are providers which have started changing their default investment strategies.

Standard Life is replacing its annuity fund with a multi-asset strategy for tens of thousands of retirement investors, while Scottish Widows is changing the default investment strategy of its group personal pension plan.

However, as bonds and equities are increasingly being viewed as less secure, defined contribution schemes are diversifying their investment strategies, Ms Silcock said.

She added that “there is more focus on the use of diversified growth funds (DGFs) as an alternative for lifestyling”.

The report showed that DGFs only have a 6 per cent chance of incurring a loss in the first five years of saving.

This figure compares to 23.5 per cent for high risk funds and 13.3 per cent for a low volatility ‘lifestyle fund’.

According to Chris Wagstaff, head of pensions and investment education at Columbia Threadneedle Investments, “people with low risk appetites and low incomes are more likely to be put off by losses incurred during the early stage of pension saving and opt out”.

He said: “Therefore, it is crucial that they are provided with an effective default option that is unlikely to incur losses early in their savings journey, if we want to avoid compounding the nation’s long-term savings problem.”

William Burrows, retirement director at Better Retirement, argued that “pre-retirement investment strategy is very important but cannot be decided unless there is some discussion about what will happen at retirement”.

He said: “The appropriate investment strategy for someone intending to purchase an annuity will be different from some considering drawdown or a ZID (zero income drawdown).

“Now, more than ever before, it is a case of one size doesn’t fit all.”

maria.espadinha@ft.com