The traditional approach of de-risking defined contribution pension schemes into default investment strategies is increasingly “out of step” with how today’s members retire, says Hymans Robertson.
With many members choosing a more flexible retirement journey, alongside enhanced options from pension freedoms, the firm said now is the time to question whether the traditional pace and depth of de-risking remains appropriate.
Historically, defined contribution schemes have had de-risking embedded into their design, with members more likely to be moved to lower-risk assets the closer they get to retirement. However, 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.
Gary Mallon, senior DC investment consultant at Hymans Robertson, said: “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.
“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 consultancy, helping schemes to avoid a potential misalignment between a de-risking pathway and member behaviour.
Mallon said: “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.”
Hymans Robertson points to 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.
Mallon added: “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.”
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