JP Morgan Asset Management head of UK DC Simon Chinnery agrees: “Member communication from a target date fund point of view is really straightforward. It is: when do you want to retire (knowing you probably won’t end up being exactly right on that) and how much do you think you can save? Everything else is done within what is effectively a fund for life which changes its asset mix or risk exposure according to age cohorts rather than individual appetite.”
Investing for the future
The change is also helping DC diversify across more asset classes and increasingly opt for active management alongside passive options. NEST’s Paul Todd said he was left surprised by how different the world of DC was to that of DB investment when drawing up the provider’s own default fund.
“Existing DC schemes tended to be very heavy in equity allocations – often as much as 100% – so there was very little diversification across asset classes,” he says. “We’re not sure why that was the case; we felt there was no reason why you shouldn’t be just as diversified in a DC scheme as you would be in DB.”
Many others agree, and this has led to a rapid increase in the use of diversified growth funds (DGFs) in defaults. In addition to providing diversification, these popular vehicles provide investors with access to asset classes which, due to cost or liquidity concerns, they would otherwise be unable to access.
“Traditionally DC was all about lifecycle funds which primarily featured passive equities and, as an individual approached retirement, gilts,” says BNY Mellon’s Doyle. “Recently we’ve seen DGFs feature more, generally in the growth or accumulation phase of an investor’s path, and we at BNY Mellon are a great believer in DGFs having a place in DC.
“Even though pot sizes are relatively small compared to the DB world – and that is changing – DGFs offer greater access to a broader range of asset classes than has traditionally been the case in DC, and we think that’s a real breakthrough.”
The next evolutionary step for default funds is likely to be based around the increasingly fluid retirement plans of members. As people decide to work for longer or opt for semi-retirement, their pension schemes will need to cater for that. Methods of allowing for a more gradual drawdown of funds are now being explored by providers and the recent relaxation of annuitisation rules will make this easier, but we are not quite there yet.
“There’s a definite realisation that with people living much longer, what was perhaps appropriate in the past is no longer quite as appropriate,” says Doyle.
“There’s a realisation we need more flexibility and the relaxation of some of the annuity rules are a step in the right direction. In fact we believe what most people actually want is a decent income at retirement, it really is as simple as that, and the way to do that is to build up a decent sized pot.”
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