Did you know that the announcement by the USA’s Federal Reserve a few weeks ago to withdraw quantitative easing took a healthy slice of money off the retirement savings pots of UK pension scheme members?
Me neither. Until I was enlightened to the fact by the lovely Laith Khalaf, head of corporate research at Hargreaves Lansdown, over a pasta funghi lunch this week.
I am no pension investment expert, but I now understand that the Fed’s decision has made bonds a lot less attractive as a pension investment option – and will continue to do so for years to come.
The problem, I learned, is that pension lifestyle funds (which still make up the vast majority of default funds, to which the majority of defined contribution members belong) automatically switch people into bonds in their final years before retirement.
Okay, I knew that last bit but hadn’t given it much thought until now. But it appears, I am not alone in this oversight.
Also, to date, switching to bonds has seemed like the only sensible option.
But now, and especially in the coming years, it would be wise for default fund decision makers (including HR and benefits managers, investment or corporate governance committees who sign off on default fund decisions) to have a serious look at, not just what investments their default funds offer, but also how their lifestyle funds derisk.
There is no golden solution to derisking in the run up to retirement. But it is better to be aware of the pitfalls than blindly walk down the same old path in a changing economic landscape.
You (and your pension scheme members) might not land up where you thought you would.