By Lydia Fearn, Head of DC, Redington
The default will never be perfect for everyone – there is no ‘one size fits all’ – but what we can do is to design the strategy to work effectively for the majority. I don’t believe the number of members investing in the default will be changing any time soon, so checking and adapting your default strategy on a regular basis is critical.
Since the freedom and choice legislation we have seen a number of pension schemes change their glidepath to target an end point that is not an annuity. I think this is very important and if you haven’t reviewed your default then you should make this a priority.
Keeping members in a strategy that aims to move with annuity prices is not the right investment strategy for someone wanting to drawdown their DC savings over time, or maintain their investment in the DC scheme for longer than their retirement age.
Whilst many have spoken of this before, it is clear not all schemes have acted.
So how do you determine what the end target should be for your members? Well understanding where they are on the journey is the first step. You should also look at their current savings in the DC scheme and their projected pot size at retirement. You may not have the complete picture in relation to all of their savings, but it is still important to work from the information you have.
From this you can get a broad understanding of who is likely to have what level of pot size at retirement. Using the information you have collated, and taking into account the cost of purchasing an annuity as well as data on what members have actually been doing, you can make a reasonable assessment of how they may act. You may conclude there is no clear evidence and you are not sure what members are likely to do as they reach retirement, and in that case I would recommend you consider a more “universal” end target, and engage with members allowing them to make more active decisions when they choose to do so.
Changing your default is not the only way to improve the investment strategy for your members – you can also consider personalised defaults. This service allows members to provide personal information, including other pension savings, and answer questions about their risk appetite. Their personalised default would then invest them in line with their answers and would keep a check on where they are on the journey on a regular (probably annual) basis. The benefit of this means that the members will be able to keep a check on their savings and keep their information up to date which can help overall long-term saving engagement.
There are many ways to structure the design of the investment strategy and this should be considered in the context of the members’ data. However, the general rules we like to follow are to:
• Start with the end in mind and consider the whole member journey;
• Taking too little risk for younger members can be as harmful as too much risk; and
• Diversification should play an active part in the overall strategy.
We have seen drastic shifts in the way default strategies have been designed in recent years, a product of the freedom & choice legislation as well as the charge cap. Therefore, to future proof your default, you need to keep a regular check on it. So, regular reviews will continue to be important to give your members the best investment strategy for their DC savings.
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