Seeing life, as I apparently do, through the prism of investment, George’s Osborne’s dark mutterings about “constitutional issues” as the House of Lords stymied his plans to cut tax credits set me musing on schadenfreude. For surely there must be a few product providers out there who felt a sliver of satisfaction at seeing the Chancellor on the wrong side of a mid-game change of rules.
“Now you know how we feel, mate,” they might reasonably have thought to themselves as the man who has for the last couple of years treated UK pensions legislation as his own personal Rubik’s cube railed at the convention-defying behaviour of peers interfering with Government plans that might arguably be seen as matters of finance.
The product providers feeling a twinge of pleasure at Osborne’s discomfort might well once have done very nicely from selling an annuity or two but, to my mind, an even more likely set of candidates for that frisson of schadenfreude will have been the investment houses behind so-called ‘target date’ or ‘lifestyle’ funds.
For years, such groups must have been hugging themselves as money poured into these funds – with no little encouragement from governments and regulators on both sides of the Atlantic, who viewed an asset mix that grew increasingly more conservative the closer one came to the target date (more often than not retirement) as an appropriate default option for workplace pensions.
Perhaps because UK and US employees felt similarly enthused about the vehicles or – just possibly – because they could not care at all and stumbled onto the path of least resistance, lifestyle funds have thrived. One estimate, from research firm BrightScope, suggests total assets in lifestyle funds have increased 280% in five years – to some $1.1 trillion (£718bn) – and could pass $2 trillion by 2020.
If that happens, mind you, it may have to be without any help from the UK where the end of the need to buy an annuity with one’s pension pot has rather diminished the appeal of the lifestyle fund. Sure, the product does a fine job of addressing volatility – the risk most investors have been conditioned to boo and hiss as the pantomime villain of investment (oh no it isn’t) – but it brings others into play.
For anyone celebrating their 65th birthday with cake, champagne and a portfolio that largely comprises cash and gilts, two risks that immediately spring to mind are they stand a very real chance of living for another two or even three decades and their pension pot could be seriously eaten away by inflation. Enjoy the fizz, old chum, there may not be many more bottles in the years ahead.
Inertia on their own part may have led many people into lifestyle funds but, now they are largely no longer fit for purpose, to what degree will inertia – this time from schemes, trustees, regulators or whomever – keep them there? Discomfited Chancellors are one thing but there is no schadenfreude to be had from a generation of struggling pensioners.
Julian Marr is editorial director of Adviser-Hub and co-author of Investing in emerging markets – the BRIC economies and beyond
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