Default investment strategies must have flexibility to deal with uncertainty

Risk strategies for pension default investments

Default investment strategies must be robust enough to be able to deal with uncertainty and the evolution of pensions, according to Tim Banks, managing director of sales and client relations at AllianceBernstein.

Speaking in a session on ‘Defined contribution (DC) investment – do we need to think again?’ at the National Association of Pension Funds (NAPF) annual conference in Liverpool, Banks said that one of the key drivers of debate around the suitability of default funds is the new flexibilities around how scheme members can take their retirement income from April 2015.

“We see annuity purchases well down and we see a lot of people delaying to take advantage of the new freedoms next April,” he said.

“Some people will take cash inevitably, some will take an income. I think we still need a default fund. We still think we need one strategy.”

He added that a very flexible approach is needed in order to cope with an ageing workforce and employees’ greater uncertainty about issues such as their intended retirement date.

“We still design very precise defaults that deliver on an exacting, very prescribed format, so I think we do need to think again,” said Banks.

“Of 1,000 people aged 40 and above, we found that in the age range 55-65, only 9% of people knew the exact date that they thought the were going to retire. Only 22% thought they knew the year that they were going to retire.

“So in a world where there’s no default retirement age and flexible working is becoming more prevalent, we need to have systems and investment strategies that manage the money right the way through to when people either take it as cash or take it as income.”

He added that default investment strategies also need to be capable of dealing with tax and regulatory changes, which it can be impossible to foresee.

In Banks’ view, default investment strategies should include clear objectives, clear allocated roles and responsibilities, age-appropriate investment designs incorporating diversification, dynamic asset allocation, easily adapatable, proactively managed, value for money and simple for members.

“The default should speak to the drawdown strategy,” he said. “The accumulation strategy will need to speak to the income strategy. Redefine the journey to make sure you have the right safeguards in the system so people can get great outcomes.

“The future of default strategy is all about living with uncertainty, having the ability to react, having the ability to give investment sophistication at low cost. The winners will be those that are robust to that uncertainty.”