There are marked differences in how pension providers are changing their lifestyling strategies on default funds following the introduction of pension freedoms.
Earlier this month it emerged that Standard Life was changing the investment strategy of its default pension fund, affecting more than one million existing customers.
Scottish Widows has also changed the default investment options for many of its pension customers. However, unlike Standard Life, those within five years of retirement will not be included in these changes. They will automatically see pension assets moved into bonds and cash ahead of their normal retirement date, unless they specify otherwise.
Other major pension providers including Royal London tell Money Marketing they have no plans at present to alter default investment strategies on their workplace pension schemes.
The FCA recently held a roundtable discussion with providers to ensure they are addressing the impact of lifestyling. One of the key issues to arise from this was the fact that the terms and conditions on some default funds prevent providers easily changing the investment mix.
Providers attending the meeting said there was also renewed emphasis on communication and member engagement to address the issue.
The FCA says it couldn’t comment on the informal discussions, but in June it issued guidance to pension providers, saying they “should continue to actively review their lifestyle investment strategies to ensure they remain appropriate for their customers and their retirement choices”.
Prior to the pension freedoms the majority of those in defined contribution workplace pension schemes took their tax-free cash at retirement, and used the remaining funds to purchase an annuity. Lifestyling strategies have reflected this – gradually de-risking funds and moving into bonds and cash in the 10 years leading up to retirement.
However, questions have arisen as to how appropriate these strategies are now considering that annuity sales have plummeted and the majority of retirees are choosing to keep pension funds invested.
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Fidelity International director of DC investments Hugh Skinner says the firm was not planning any further changes to its default pension schemes. He says: “Fidelity redesigned its lifestyle strategy ahead of the pension freedom rules. We are trying to provide a suitable investment strategy regardless of whether customers annuitise, withdraw cash or move into income drawdown.”
L&G also said it had moved to a multi-asset strategy.
Skinner says the company still looks to de-risk assets as individuals approach their normal retirement date, but these funds would continue to have exposure to assets that have the potential to deliver real returns over the longer term.
Royal London says its default funds would continue to target an annuity purchase. Investment strategy manager Lorna Blyth says the company’s data shows only a modest rise in the number of people opting for income drawdown.
She adds: “We have a more diversified default fund than some competitors, investing in commodities, property and absolute return funds.”
Blyth says the changes must be put against wider stock-market movements in 2016/17, and that “buoyant stock markets may be encouraging pension savers to stay invested”.
However, providers are concerned that changes to lifestyle strategies could leave them exposed to complaints in the event of a stockmarket correction.
PwC DC pensions leader Philip Smith says: “Providers have to calculate whether there is a risk to consumers if they alter this lifestyling.”
Smith adds that providers can’t automatically shift consumers from one product to another without getting the customer’s permission first.
Not all insurers are caught by such restrictive terms and conditions. Scottish Widows head of pensions and workplace policy Peter Glancy says the company provides a “default solution” which involves a mix of funds. “We are not switching customers into a different product but can change the funds used to provide this default solution. It’s up to us to make sure we have the right funds to provide a mix of growth and risk tolerance.”