JLT switch to TDF default sees boost in engagement

Thirty-two per cent of employees at the insurance broker and consultancy, whose employee benefits subsidiary has for some time touted the virtue of TDFs, now shun the trustees’ chosen default; this figure is down from 40 per cent prior to the funds’ introduction.

The TDFs managed by AllianceBernstein replaced the consultancy’s in-house growth fund as the default in December 2017.

The scheme follows the example of others such as master trust Nest, Telegraph Media Group, and the Combined Nuclear Pension Plan, although anecdotal evidence suggests most UK schemes prefer TDFs’ derisking cousin, the lifestyle strategy.

The fundamental difference is who executes that asset allocation change

Ralph Frank, Cardano

Both strategies involve DC schemes reducing risk in members’ portfolios as they near retirement, typically switching from equities into lower-risk bonds.

In a TDF, members select or are allocated a fund corresponding to the year in which they will retire, with the manager derisking the entire fund gradually. In a lifestyle strategy, the same ‘glide path’ is effected by the trustees, who sell equity fund units into less risky funds as a member ages.

With a large proportion of its membership made up of pensions and insurance professionals, and just 60 per cent of members in the default before the switch, JLT’s membership is arguably more engaged than others. By contrast, 99 per cent of master trust members are in their default offering, according to the Pensions Policy Institute.

The influx of more than 1,000 members back into the default by active choices appears to show that these members see the new structure as offering value for money that was not provided by the previous in-house fund.

JLT claims TDF features drive engagement

Maria Nazarova-Doyle, head of DC investment consulting at JLT Employee Benefits, said the scheme’s trustees had held concerns that despite the unusually engaged membership, “the inflexibility of traditional lifestyling strategies may pose risks to members who choose to stay invested at retirement following the introduction of freedom and choice”.

She put the move back toward the default down to the chosen TDF structure, as the scheme noticed a high number of members changing their retirement dates.

“The trustees attribute this dramatic increase in engagement to the fact that TDFs, being a new and exciting proposition, were the draw that attracted people to log in and review their options,” she said. “By focusing on the date a person is expecting to retire, the move to TDFs also simplified member communications and encouraged members to consider what the right date would be for them.”

Elsewhere in the pensions industry, experts are more agnostic about the choice between TDFs and lifestyling.

Ralph Frank, head of DC at consultancy Cardano, described the two structures as “brothers from the same mother”.

“The fundamental difference is who executes that asset allocation change,” he said. While some argue that derisking within one fund structure makes TDFs more operationally efficient and less costly, Frank said this “really depends on how the TDF is constructed”.

One advantage is that the outsourcing of derisking to a manager enables this to be carried out in a dynamic way reacting to market events, rather than just sticking to a fixed schedule, he added.

Equities spread across geographies

Despite the JLT scheme’s insistence on the virtues of its chosen TDF structure, the underlying asset allocation will look similar to many lifestyle strategies.

Members focusing on growing their savings as much as possible will see around 90 per cent of their pots invested in equities, with diversification by geography and style augmented by property and commodities exposure.

Underlying funds are all passively managed, although a multi-factor exposure is used. The funds offered by AB with the longest time range have returned around 7.3 per cent gross, roughly on track with their benchmark and comfortably more than 4 percentage points above the consumer price index.

Steve Charlton, managing director of asset management company SEI’s DC institutional business, urged trustees not to be put off riskier assets by recent headlines showing markets nervousness and the potential for long bull runs to come to an end.

The S&P 500 index of US stocks entered negative territory for the year on Wednesday last week and came close to a correction, before trimming these losses later in the week.

“[For] people that are coming into the savings environment today, it will be the best part of 40 years before you will ever be in a position to access that money,” said Charlton.

Rather than trustees worrying about the potential for a market correction in the short term, he said schemes should focus on the most appropriate asset mix to meet members’ long-term goals.

Charlton agreed that 90 per cent allocations to equities are appropriate given these long time horizons, and stressed that schemes should be careful to diversify by geography, rather than allowing large home biases.

Allocation aims to please all at retirement

If the vast majority of DC schemes are comfortable with large equity allocations in accumulation, the changing demands of retirees mean decumulation strategies vary more significantly.

In the broader market, the Financial Conduct Authority has found that small pots mean the majority of members take the full amount as cash. By contrast, Nazarova-Doyle said her assumption is that the majority of members are transferring out into drawdown, though she admits “we are working on improving these stats, as they could be incredibly helpful to support the trustees’ decision”.

Despite this emerging preference, the consultancy has chosen not to target drawdown purchase specifically, keeping retirement options open. “Members are free to move their assets into a “younger” or “older” fund at any time according to their needs, and this move would put them into the most appropriate fund,” said Nazarova-Doyle.

The chosen fund range derisks into a mix of gilts and corporate bonds, but retains a substantial equity component of around 15 per cent even 10 years after retirement.

The fund closest to retirement used by JLT, the AB Retirement Fund 2014-2016, has delivered a gross return of 1.27 per cent since the December 2017 launch. That puts it behind both a simplified benchmark return of 1.92 per cent and a ‘CPI+1 per cent target’, which currently stands at 2.76 per cent.

When deciding on a strategy for retirement, there is a danger that trustees “paint themselves into a corner” in trying to provide for all retirement options, according to Cardano’s Frank.

“You have what you think is most appropriate and then you also provide options for the people who are engaged and don’t think the default is for them,” he said.

Engagement can ease default headaches

In an attempt to mitigate the risk that inert members end up in an arrangement that does not suit their needs, JLT has also launched a system of customisable electronic nudges, encouraging them to access JLT’s own Benpal platform.

With freedom and choice making derisking significantly harder for DC schemes, there is no replacement for knowing your membership, said Jon Parker, director of DC and financial wellbeing consulting at Redington.

He said his clients are encouraged to regularly “closely monitor what the actual activity in the scheme is”, thereby informing the derisking path the scheme should follow.

Engaging with members will also help tailor solutions, he said, although he admitted that in many cases, efforts to engage savers early enough to materially influence their outcome can be fruitless.

“It’s really difficult to get people to think about these things even five years out,” he said.