DC at retirement: Is your default asset mix transition ready?
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How are investments in defined contribution schemes evolving to support the transition of members’ assets for their next phase of life?
Defined contribution investments have been on a journey since the introduction of auto-enrolment in 2012 and the pension freedoms in 2015. Many default investment options were changed in the wake of the freedoms to target flexible drawdown instead of annuity purchase, leaving some risk on the table at retirement – without having a clear view of what people's asset mix after retirement would look like.
Since then, the debate about investments has largely centred on ways to bring illiquid assets into DC funds, but the member journey might now be coming back into focus. The last government proposed a requirement on trust-based schemes to have a decumulation offer. Along with the policy push, there is also a natural evolution of the approach taken in DC investments as schemes are maturing, with increasing numbers of people nearing retirement that rely exclusively on DC for their pension income.
These developments are prompting some discussion among trustees, according to two consultants.
“One of the interesting things now is, what should [investments] look like in a post-retirement world?” says Anne Swift, a senior director DC investment at consultancy WTW.
To access drawdown, members of a single trust DC schemes mostly need to transfer to a provider or master trust, and many schemes already partner with one. That transition is now coming on the radar more.
“The question now is, are we aligned with how a member might invest when they get to that point? It’s not something we have spent as much time on as we have on, ‘What should growth assets look like?’” said Swift.
Alignment means trying to create a smoother investment transition, to minimise negative effects on the member.
Swift warns of sequencing risk if there is a big mismatch of assets: “How do you make sure there is not a cliff edge when somebody gets to the point of transfer?”
While not necessarily looking to match assets completely, she says schemes want to have a default portfolio that is “broadly comparable” with the post-retirement solution, “so you’re not suddenly in a position where you are selling a whole load of fixed income or buying a lot of equities”.
Transfers also usually mean that a member is out of the market for a period; there are also costs associated with transferring.
Conversations about where members might “land” after retirement are at an early stage but starting to happen, she notes – and could get further traction: “With the previous government’s consultation on decumulation solutions, I think those conversations will start to get more prominent on trustee boards. They will start thinking about it in a way they haven’t necessarily to date.”
Trustees thinking about the match between assets before and after retirement in DC is something Laura Myers, head of DC at consulting firm LCP, is also seeing more of.
Some single trust DC schemes have bespoke investments in the master trusts they have partnered with for post-retirement, so that their members can move into drawdown without any out-of-market risk or transaction costs, she explains.
“It can be complicated to do administratively in DC schemes, but we’ve seen more examples of this,” Myers says.
Defined contribution investments have been on a journey since the introduction of auto-enrolment in 2012 and the pension freedoms in 2015. Many default investment options were changed in the wake of the freedoms to target flexible drawdown instead of annuity purchase, leaving some risk on the table at retirement – without having a clear view of what people's asset mix after retirement would look like.
Since then, the debate about investments has largely centred on ways to bring illiquid assets into DC funds, but the member journey might now be coming back into focus. The last government proposed a requirement on trust-based schemes to have a decumulation offer. Along with the policy push, there is also a natural evolution of the approach taken in DC investments as schemes are maturing, with increasing numbers of people nearing retirement that rely exclusively on DC for their pension income.
These developments are prompting some discussion among trustees, according to two consultants.
“One of the interesting things now is, what should [investments] look like in a post-retirement world?” says Anne Swift, a senior director DC investment at consultancy WTW.
To access drawdown, members of a single trust DC schemes mostly need to transfer to a provider or master trust, and many schemes already partner with one. That transition is now coming on the radar more.
“The question now is, are we aligned with how a member might invest when they get to that point? It’s not something we have spent as much time on as we have on, ‘What should growth assets look like?’” said Swift.
Alignment means trying to create a smoother investment transition, to minimise negative effects on the member.
Swift warns of sequencing risk if there is a big mismatch of assets: “How do you make sure there is not a cliff edge when somebody gets to the point of transfer?”
While not necessarily looking to match assets completely, she says schemes want to have a default portfolio that is “broadly comparable” with the post-retirement solution, “so you’re not suddenly in a position where you are selling a whole load of fixed income or buying a lot of equities”.
Transfers also usually mean that a member is out of the market for a period; there are also costs associated with transferring.
Conversations about where members might “land” after retirement are at an early stage but starting to happen, she notes – and could get further traction: “With the previous government’s consultation on decumulation solutions, I think those conversations will start to get more prominent on trustee boards. They will start thinking about it in a way they haven’t necessarily to date.”
Trustees thinking about the match between assets before and after retirement in DC is something Laura Myers, head of DC at consulting firm LCP, is also seeing more of.
Some single trust DC schemes have bespoke investments in the master trusts they have partnered with for post-retirement, so that their members can move into drawdown without any out-of-market risk or transaction costs, she explains.
“It can be complicated to do administratively in DC schemes, but we’ve seen more examples of this,” Myers says.
How are you planning to address the investment transition at retirement for your DC members?
