One of the peculiarities of the UK pension market is that we force people to buy their own pensions. Australia and the USA just lets you draw down your pot while our European colleagues operate collective decumulation where one big pot pays pensions to many.
Our peculiarity has lead to a unique pre-retirement investment strategy called lifestyle. In truth it’s an ungly beast that is no more than a mechanism to get people out of volatile equities and into the safe harbour of cash and into Government bonds (gilts) which provide an insurance against the cost of annuities rising. While it might have been a reasonable stop-gap solution when it was introduced in the mid 90s, lifestyle was never seen as the long-term answer. something would come along and replace it.
Well that something came along , hung around a few years and is now winning some friends. That something is called the target dated fund and you can find it in your local neighbourhood master trust (NEST, BlueSky, SHPS, Pension Trust).
But you can’t find target dated funds in any insurance contract – GPP or otherwise. BGI set up a range that looked great and now seem to be stuck in the Black Rock garden shed not having caught on with the platform providers or the third party administrators.
Legal and General investment Management have invested heavily in developing the know-how to launch these funds but have not taken them to market because their is no market.
For some reason, the insurers are wedded to lifestyle as the default mechanism for their insured products and nothing’s going to change that soon…it would seem.
Well I’d like to throw some rocks at the greenhouse.
Firstly these target date funds are the consumer’s friend. It is a lot easy to chose a fund with a year attaching to it – “your best guess of the day you start getting money for your retirement”. Even if you have to change your best guess a couple of times, it’s an easy concept to grasp- “heh, I thought it would be 2013 but maybe it’s 2016 now because my lottery numbers didn’t come in” – kind of thing.
Secondly, managing assets within a single fund is cheaper, less risky and neater than managing a bunch of funds and buying and selling units between them. TDF‘s manage things within a single fund, lifestyle is a mass of buys and sells which is a messy, expensive and risky way of doing things;. If you wanted to design a pre-retirement approach you would not chose lifestyle, you would chose TDF
Thirdly, TDFs are collective and collective schemes bring long-term economies through pooling. The one unexplored continent for asset managers is the management of post-retirement assets – collectively – as happens in Europe. It’s virtually impossible to see this happening with the individual lifestyle approach, it’s easy to see this happening with TDF (ask Alliance Bernstein).
So, with all the headwinds in the favour of TDFs and against Lifestyle it’s hard to see why insurers aren’t switching to TDFs.
To understand why, you need to understand the extremely complicated relationship between the large consultancies that own the workplace savings market for the FTSE 350 and realise that there is nothing in it for them, if asset managers control the asset management process. I know that sounds strange but investment consultants have wanted to be asset managers for as long as I can remember and they have not bought the TDF story (even though it is possible for them to manage the assets within the TDF)!
Without impulsion from the large consultancies, the big insurers will do nothing. Firms like mine can jump up and down with phrases like “force for good” , “do your duty” etc, but the vestigial drag of inertia defeats our efforts!
And to be frank, below us independent actuaries, there are few who have the time or inclination to bother. So long as the client doesn’t know the difference between lifestyle and TDF , there is nothing in it for the small firm in telling them. Even today, when TDFs are competing against lifestyle in the Master trust v GPP battle, the arguments for and against TDFs and Lifestyle rarely make it past the appendix of the client report.
With such apathy, it is not surprising that the insurers are not bothering to make the systems changes necessary to turn lifestyle off and TDF on. It is a huge ask and a huge risk to the Proposition managers already fighting fires over pot follows member, consultancy charging, on boarding and of course the spectre of 1.2m expectant employers queuing up for their auto-enrolment gruel!
This does not mean we should stop pushing. I was down at one of the big GPP providers yesterday, banging on in my usual fashion. “What’s he on” said the face of the man on the other side of the table “bet he thinks he can save the world”..
Well I can’t, I can only write about doing the right thing and hope that sooner or later, a commercial argument aligns with a moral argument and we end up with better.
Target date funds have been slow to catch on because we have poor DC governance in the UK , have had poor DC regulation (note us of past tense) and because there has been insufficient understanding of the issues among the key influencers, the press to take on the inertia created by disinterested consultancies.
- Helping companies take decisions on pensions (henrytapper.com)
- Ten sexy stats that drive pension firms wild! (henrytapper.com)
- Those Dutch pension cuts in full! (henrytapper.com)
- A democratic way to improve DC investment. (henrytapper.com)
- Pensions for nothing and advice for free (henrytapper.com)
- Who speaks for workplace pensions? (henrytapper.com)
- The sins of the past (henrytapper.com)
- Bridging that advice gap – 43rd London Pension Lunch (henrytapper.com)