Defined contribution schemes are revisiting their investments to suit their membership, with trustees finetuning both defaults and self-select options amid growing assets, membership and regulatory scrutiny. 

Among the DC schemes that are reviewing their investment offer is the Tesco Retirement Savings Plan. The scheme for the UK’s biggest supermarket is making changes to its self-select fund range as part of an ongoing review of the options available. 

The scheme has added a Tesco Growth Phase and a Tesco Retirement Phase Bond Fund to the fund range, while the Tesco Equity Fund will be diversified into different market caps and geographies. The Tesco Diversified Fund is being closed.

Meanwhile earlier this year, the DC plan of defence company Leonardo altered its lifestyle option so members stay invested in higher risk and return assets for longer. A member survey led the trustee to do away with a ‘stable growth’ phase in the default that was aiming for CPI plus 3-4% and started a full 30 years from retirement.

Instead, 20 years from retirement, pensions now move from the ‘long-term growth’ fund, aiming for CPI plus 5%, directly into a cautious growth fund (CPI plus 3%) over 10 years. Previously, the transition into this fund started 15 years from retirement and was complete 10 years before retirement. Five years to retirement, the default now adds liquidity so members end up with 75% cautious growth and 25% cash.

Also among the schemes tweaking their investments, the Financial Conduct Authority pension plan’s DC section changed funds in the lifestyle strategy last year, to improve the potential for growth, while adding a Shariah fund to the self-select range.

Many DC schemes have been reviewing their investment strategy recently, says Reena Tanna, director at Howden Retirement. This is mainly down to innovation in the DC pensions investment markets, she believes, which has meant that interest in incorporating private markets into DC defaults has increased and there is now greater focus on supporting members to-and-through retirement. 

“In particular, trustees have been considering their diversified growth allocations and whether a strategy adopting public/private equity, potentially alongside a multi-asset credit allocation, may better meet the long-term needs of their membership,” Tanna says.

Within equity markets, trustees are reassessing their geographical concentration because of the strong growth of a small number of US technology companies over the last few years, she notes – and the risks and opportunities this poses for DC members. 

As more members begin to retire on DC only, how they take their pension is being closely watched.

“We have seen an increasing number of DC members accessing savings by drawing cash throughout retirement. Therefore, trustees are assessing whether their members are likely to access savings in this way and, if so, does their current default best support members for this?” says Tanna. 

She suggests a higher risk and return-seeking strategy might better reflect the longer investment period associated with members drawing down savings after retirement, rather than simply taking all savings at retirement.

  

As many members struggle with how much to withdraw and what to invest in through retirement, Howden expects providers and trustees to be working towards guided retirement, where members have a structured investment pathway.

 

Providing a regular income through guided retirement or ‘default pension benefit’ solutions will become mandatory for master trusts and contract-based DC schemes in 2029, and for single trust schemes in 2030. 

 

It will be important to offer a full strategy design that follows members through their whole retirement while being flexible enough to adapt to individual needs – which can change over time – argues Tanna.

 

“How this works in practice is still being ironed out, but the industry’s focus is on ensuring members experience a smooth and well supported investment journey in the approach to retirement, at the point of retirement and also when they are drawing down their savings,” she said.