Pearson Group Pension Plan has replaced the default option of its money purchase section with three lifecycle options designed to provide a wider range of investment and decumulation strategies for members.
It is the latest scheme to have reviewed its defined contribution lifestyling approach to better satisfy diverse savings objectives. The scheme, which is provided by the owner of Pensions Week, decided to introduce three new lifecycle options (see box), each with different risk characteristics.
Pearson's lifecycle options
Option A: Designed for members who prefer a mix of investments that are less volatile and do not aim to produce such strong long-term returns.
Option B: For those prepared to take a higher level of risk for the potential of higher returns in earlier years, but want to start moving into lower risk investments from 15 years before retirement.
Option C: Accommodates members who can accept more investment risk and for a longer time in the hope of stronger long-term returns. This option moves to less volatile funds over the final five years before retirement.
“The aim of this change is to try to meet the needs of most plan members by providing greater choice and access to the potential for enhanced investment returns,” said a Pearson spokesperson.
Option B will become the plan’s default fund under auto-enrolment. The scheme's staging date is September 1 2013 and it is expected 2,000 eligible employees will be auto-enrolled.
"Auto-enrolment was not a key deciding factor in the changes to the lifecycle arrangements, as the main focus for the investment changes has been to give members greater choice with the potential for a better outcome at retirement," the spokesperson added.
The options are available to new members and are also open to those who are not in one of the lifecycle options and make their own fund selections. The money purchase scheme has more than £228m worth of members' investments and currently has 4,978 active members and 5,840 deferred members.
Catering to members' individual needs
Lifecycle strategies are used by schemes to cater to as many members as possible, but this approach has been criticised for not taking into account savers' individual needs.
Stephen Budge, head of DC investment at consultancy KPMG, said it was becoming more common for schemes to offer members a wider variety of investment options.
"We are seeing a lot of interest, particularly because it provides the alternatives to a default," he said, adding that engagement was an important part of this process.
"Even if someone stays in the default that is fine. What schemes are trying to do is make sure that members [choose to] stay in the default first rather than just being auto-enrolled straight into it," said Budge.
Although schemes are now starting to offer more choice to members, communicating these options is an area that needs to be improved, said Laith Khalaf, head of corporate research at pension provider Hargreaves Lansdown.
“What providers and advisers need to do is provide communications to members that are simple to understand, and help them understand which of those investments they should be choosing,” he said.
In a similar move to Pearson, last year IBM replaced its default fund with two lifecycle choices. The scheme said at the time that it wanted to offer members greater flexibility in their investment choices.
Auto-enrolment has also pushed many schemes to review their default options, with Prudential recently tweaking its set-up to make its multi-asset lifecycle offering the automatic investment choice for new members.
Daniel Smith, director, business development DC and workplace savings at Fidelity Worldwide Investment, said the government's reform has had an impact on schemes and employers.
"Most people are just taking the opportunity to say, ‘Is my default investment strategy up to date and modern?' [Auto-enrolment] has been a real driver for change, definitely," he said.
