Emma Douglas, Legal and General, discusses the DC investment journey post-Budget
The 2014 Budget made radical waves in the pensions industry – at this year’s DC Insight, Emma Douglas, head of DC solutions at Legal and General, discussed how it has changed the investment strategy of DC schemes.
While the growth phase of schemes has not changed radically since the Budget announcements, Douglas explained that the changes have made derisking far harder to design due to the lack of clarity around what members will do at retirement, especially in the light of the new wealth of choices and the lack of set retirement age.
“The changes have made derisking far harder to design due to the lack of clarity around what members will do at retirement”
While the new freedom of choice has been hailed as a brave new world for the industry, there are concerns that it raises: trustees have expressed worries that DC members are simply not engaging with their choices and continue to fall into the default fund.
Equally, with increasing life span comes increasing health problems. Douglas raised the thorny question of whether choice has a ‘sell-by’ date, as the oldest generation, tackling problems from infirmity to dementia, may not want or cope with the financial stress of making these choices.
Furthermore, there is a legislative clash between employees’ freedom of choice and employers’ need to choose an appropriate default option. Members must be engaged to avoid ending up in the wrong default fund.
“Douglas raised the thorny question of whether choice has a ‘sell-by’ date”
Douglas proposed a series of innovative options to engage members and give them adequate choice:
- Cash out plans: similar to fixed-term annuities in style, with guaranteed payments and tax efficiency.
- Half and half: allowing freedom but also stability at the same time.
- Income drawdown with longevity insurance: a fixed period drawdown followed by an annuity.
- Income drawdown with underpin.
Only a small number of trust-based schemes are currently offering drawdown – most are looking for post-retirement partners, for example in personal pensions or master trust arrangements. It is a paternalistic approach, and Douglas advocated consideration of key facts:
- Adequacy and sustainability of the income
- Longevity of the income
- The sensitivity to different withdrawal rates
- How to limit downside risk
- Fees and charges
Most of all, Douglas commented, it will take time to see the impact of the changes – the industry is not seeing ‘end game’ options, but rather offering options to help members navigate the “maze of sharks” that constitutes the choices with which they are now confronted.