Inflexibility of Lifestyle funds makes employers jittery

Rigidity of Lifestyle Funds have Caught Employers on the Wrong Foot

Rigidity of Lifestyle Funds have Caught Employers on the Wrong Foot

Employers are reconsidering the structure of their default pension fund options as retirement patterns are due to change and more people will opt for income drawdown options, after recent research highlighted the importance of staying invested post-retirement in growth assets such as equities. Lifestyle funds are being perceived as too inflexible since they switch out of growth assets as retirement approaches because they were designed assuming the next stage will automatically be annuity purchase,  thus preventing assets growth even if retirement has been delayed.

The Department for Work and Pensions (DWP) has already clarified that if has high expectations from employers on auto-enrolment default options, making full review compulsory every three years or when certain important events occur related to the economy and financial markets.

“There is an opportunity for less risk averse investors to continue to add to their pension pot after retirement and if you believe that there will be an equity risk premium it’s worth hanging on to a few equities after you retire,” said John Stannard, co-chair, Global Consulting and Advisory Services at Russell Investments.

A recent research in the Netherlands revealed that post-retirement, 40-45% of pensions worth can be generated from investments if at least 35% growth assets are maintained in the portfolio.

“One area that screams at employers and stands out is the retirement outcomes piece. The decisions employees make at retirement are crucial”, said Steve Herbert of JelfEB.

However, NEST has already factored in the change. NEST has already decided to adopt Target funds, given its access to huge resources, revealing the limitations of Lifestyle funds. When retirement approaches, a member must move out of growth assets in Lifestyle funds by selling assets individually, incurring trading costs. Since this is done at the fund level, members have greater flexibility and can easily defer their retirement.

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