Fund choices must be more flexible

Employers should consider how to build flexibility into the fund choices available through their pension schemes, to help employees optimise their retirement income, said Tim Taylor, head of group reward at Tui Travel.

Speaking at Employee Benefits Live, Taylor, said the removal of the default retirement age (DRA) meant that a number of employees may consider working for longer before retiring, with some opting to work flexible hours while drawing down their pension.

In such cases, traditional pension lifestyle funds, which typically reduce pensions scheme members’ exposure to equities and increase exposure to relatively lower-risk assets such as bonds and, eventually, cash, could potentially jeopardise employees’ retirement fund levels, he said.

For example, an employee who decides to extend their retirement age by five years to 70 could miss out on potential gains by having their investments diverted away from equities and into cash in the final five years of their working life.

Taylor said: “As you move to pre-retirement and get close to retirement, savings [in a traditional lifestyle fund] are diverted into cash, which is perfectly acceptable. But does this give people enough flexibility for what they want to do? If people want to continue working later, is this the right choice?

Taylor added employers need to offer a greater choice of funds to cater for differing employee retirement needs.

In the session ‘Avoiding the pensions time bomb – HR and finance directors working together’ he said: “As we’ve moved away from the DRA, obviously assumptions you might have built into your lifestyle fund – ‘join here, retire at 65’ – may be different.

“We need to think about lifestyle funds in a slightly different way, to see what flexibility we can build in. Is there an opportunity to give people a little more diversification that’s not so equity-based?”

Taylor advised employers to consider providing employees with access to a range of asset classes, including property and overseas equities, to give pension scheme members a greater blend of investment choice.

But employers first need to understand the profiles of their pension scheme members to be able to select appropriate funds based on employees’ investment needs.

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Taylor suggested segmenting members into three camps: ‘genuine defaulters’, who will be unlikely to want to dabble with investments; ‘guided decision makers’, who are a little bit more aware and maybe want to make decisions about their investment choices; and ‘self selectors’, who actively want to think about and mange their investments.

He said employers should then consider three pension savings phases: the growth phase, within which employees are embarking on their career and have not yet built up a significant retirement fund; the risk reduction phase, within which employees are mid-career and have reasonable-sized pension pots and factoring risk into their investment decisions; and the pre-retirement phase, where employees are crystalising the investments they have made, though they may still be looking to increase the size of their fund if they opt to work for longer.