With many members choosing a more flexible retirement journey, alongside enhanced options from Pension Freedom and Choice, now is the time to question whether the traditional pace and depth of de-risking remains appropriate.
Historically, DC schemes have had de-risking embedded into their design; the closer a member got to retirement the more likely the scheme was to move members into lower-risk assets protecting members from pre-retirement market volatility. With a decline in the use of annuities and members increasingly remaining invested for many years post-retirement, the firm warns that a more growth-oriented approach may be a better solution for both members and the scheme.
Commenting on the changing investment strategies that DC schemes must consider, Gary Mallon, Senior DC Investment Consultant, says: “Members’s expectations and needs today can look very different to those at the time of a scheme’s inception. It’s therefore imperative that schemes evolve their offering to reflect the current pension landscape ensuring that their scheme matches the aims of their members.
“Our paper explores the changing needs and wants of members. It considers the options for designing a DC scheme that accounts for member needs, as well as reviewing behavioural trends that are taking place in wider society. Looking back, de-risking was the logical solution for retirement options available at the time, as it sought to remove risk by moving members to annuities. The radical changes that the advent of pensions freedom brought a decade ago combined with an increasingly greater proportion of people retiring with DC only provision has challenged that option and the wider pensions landscape, for the majority of retirees.
“Taking a more flexible approach towards DC retirement strategies should become the default, says the leading pensions and financial services consultancy. Such an approach will help schemes to avoid a potential misalignment between a de-risking pathway and member behaviour. Changes in lifestyle, a more phased retirement journey as well as a move towards drawdown and later life employment are some of the key factors which must be considered.
“Restrictive life styling models, particularly those that aggressively reduce growth asset exposure close to retirement may no longer suit the interests of some members. While these models protect against volatility, providing stability for those close to retirement, they also typically reduce returns in this final stage. A more member-centric flexible path that takes into account the behaviours and risk attitude of the member as well as any retirement trends would be a better approach.”
Commenting on behavioural changes to members retirement journeys, Gary says: “We know that today’s members are more likely to follow a gradual retirement path with a move towards drawdown and accessing their pension more flexibly. Retirement is no longer seen as a cliff-edge moment, but instead a gradual transition with many individuals more likely to remain within employment on a phased basis. Set against a population who are living longer, with a diversified range of income sources, and the problem is clear; investment strategies of old no longer meet the needs of a modern member.
“If we look globally, we see the Australian Model of Superannuation Schemes as a viable alternative to the UK approach. This model enables Australian default strategies to maintain a significant allocation to growth assets, as well as equity exposure far higher to retirement than UK schemes typically offer. This allows members to remain invested and draw income flexibly over time. Where de-risking does take place, it’s a much more gradual process often delayed until much closer to retirement and is viewed as one of many investment strategy options rather than the default choice.
“Reducing short-term volatility, and financial market impacts, as members approached retirement was traditionally seen as the focus for DC schemes. For today’s DC members the likelihood of an insufficient pension pot which meets their retirement needs is now deemed to be a bigger threat than market fluctuations. Reducing the length of de-risking until closer to retirement, and instead taking advantage of growth exposure by challenging scheme design would help to solve this problem.”
Gary continued: “Implementing a growth orientated, flexible investment approach, set alongside a DC scheme design which protects and considers all members is a delicate balancing act. However, by putting member outcomes at the very centre of a de-risking strategy and ensuring that this truly reflects – and matches - current member behaviour is key. Default strategies must be robust but also responsive with a clear understanding of risk, time and most importantly member needs. If schemes can achieve this, they have the potential to improve DC members retirements both today and in the future.”
|
