Pru amends DC default, as experts warn against 'wait and see' approach

The pension freedoms prompted many DC schemes to review their strategies to establish whether their default fund was still suitable, depending on how members were likely to take out their retirement savings.

If trustees have not reviewed the default fund they should be doing so without delay

Chris Roberts, Dalriada

Members of the Prudential Staff Pension Scheme were notified that the trustees “reviewed the scheme’s default lifecycle strategy” in light of the introduction of the new flexibilities in April 2015.

“Following this review, the trustee agreed that the current default strategy will be amended,” said the scheme.

In the fund’s 2016 accounts, members were told that “the amended Multi Asset Lifecycle is expected to be implemented by early 2017” and will “target a more balanced investment strategy at retirement”. It added: "Announcements to members and changes to the communications... will be made at this time."

The scheme, which has around 6,552 members, also offers two alternative lifecycle options. These include a passively managed lifecycle and an actively managed one.

Choosing a default

Niall Alexander, director of DC solutions at consultancy firm P-Solve, said most schemes have already tweaked their default funds.

“In our experience, most schemes have done at least something, recognising that the traditional approach, of default funds targeting 25 per cent cash, 75 per cent annuities, isn’t fit for purpose post-pension freedoms,” he said.

However, he noted that it is challenging to pick a single default “when members have multiple, equally viable options” and pension funds are approaching this in different ways. 

For example, a scheme can put in place regularly reviewed hybrid strategies, which target a mix of annuity, income drawdown and cash. 

Other schemes have picked a model that means “the lifestyle branches off into cash, annuity or drawdown options near the end, with one prong continuing as the default”, he added.

“Worryingly though, we see some schemes just adopting a 'wait and see' approach, carrying on with the outmoded cash and annuity model while they wait for actual retiree data to help them design their default,” said Alexander.

While this may be useful for future generations of retirees, clients should think about members retiring today, he said.

Review but don't rush

On the other hand, Mark Futcher, head of DC and workplace wealth at consultancy Barnett Waddingham, said: "The default fund is all about saying what the majority should do”.

Consequently, when it comes to reviewing and amending it, “I think it’s right to take your time to make sure that you get it right for your scheme”, he explained.

"People haven’t got large DC pots at the moment, they just haven’t had the time to build those up, so we still don’t know what the position [will] look like in 10-15 years,” Futcher said.

Similarly, Chris Roberts, professional trustee at Dalriada Trustees, said: “I would be extremely surprised if most schemes had amended their default arrangements post pension freedoms.”

He explained that there are many legacy arrangements either ill-equipped or unable to make these changes, but well governed or larger schemes are likely to have made more progress. 

While some schemes have not made changes to their default to adjust to the freedoms, "if trustees have not reviewed [it] then they should be doing so without delay”, Roberts advised.

When notifying members of any amendments, communications should be “jargon free, concise and displayed in a user-friendly manner”, said Roberts.

“Quality communications do not have to be fancy or expensive. Spending time understanding your membership and communicating in a manner that will appeal should be the object, and a requirement, of all trustee boards,” he added.