Visa scheme cuts lifestyles and introduces white-labelling

A review of the scheme’s investment strategy, which included a review of its default arrangement, resulted in a reduction to the number of lifestyle strategies offered – from five to three – according to a statement signed off in March by chairman of trustees Peter Gibbs.

The main advantage of white-labelling is that it enables the trustees to make changes to the overall fund on an ongoing basis without seeking member consent each time

Aimee Denham, professional trustee

The trustees’ review was completed in February last year and changes were implemented in September 2018.

The change involved a reduction in the number of lifestyle strategies targeting annuity purchase from two to one: replacing the Annuity Purchase – Active and the Annuity Purchase – Passive lifestyles with the revised Annuity Purchase Lifestyle.

The trustees decided to close the drawdown lifestyle and transitioned members’ assets into its Options Open Lifestyle. This lifestyle, and the scheme’s Lump Sum Withdrawal lifestyle, remain.

According to the chairman’s statement, the Options Open Lifestyle has been retained as the scheme’s default investment arrangement.

When the lifestyle options were reduced, the three options “were further revised with the aim of enhancing members’ risk-adjusted returns through to retirement and the projected value of members’ at-retirement savings”, the statement highlights.

The three options will initially invest in two white-labelled funds – with 90 per cent in the Visa Global Equity Fund and 10 per cent invested in the Visa Property Fund – from the start of the lifestyles until 15 years before the member’s chosen retirement date.

At that point, the lifestyles will gradually switch some of the member’s money into lower-risk assets. They will all remain identical until five years before the member’s retirement date.

The default lifestyle strategy invests 47.5 per cent in gilts and bonds, 20 per cent in a multi-asset fund, 10 per cent in cash, 5 per cent in property and 17.5 per cent in global equities at retirement.

The Annuity Purchase Lifestyle invests 25 per cent in cash-like instruments and 75 per cent in an annuity-matching fund at retirement, while the Lump Sum Withdrawal Lifestyle invests 100 per cent in cash-like instruments at the member’s selected retirement date.

Avoid overwhelming members

Since the introduction of freedom and choice, the majority of schemes offer three or more lifestyle strategies, according to LCP’s 2018 DC investment survey.

It found that, including their default, 33 per cent of plans offer three lifestyle strategies, 27 per cent offer more than four lifestyle strategies, 21 per cent offer two, and 19 per cent offer only one lifestyle strategy.

While offering a number of strategies gives people more choice, trustees should think carefully about whether doing so will confuse members.

Aimee Denham, a professional trustee due to join 2020 Trustees in July, says that schemes could offer myriad strategies to allow members to try and target their desired retirement option.

“However, in practice this is likely to be confusing for members, and requires greater resources from the trustees in terms of monitoring funds and communicating with and educating members on the nuances of the strategies,” she notes.

Consequently, there has been a trend to reduce the number of lifestyle strategies, or adapting them so that they align with retirement options.

“Even where schemes have sought to create multiple lifestyles, in my experience many scaled back their plans as the funds ended up being underutilised and created unnecessary complexity without adding any real value,” Ms Denham says.

Three strategies is typical, she notes, with one targeting 100 per cent cash withdrawal on retirement, one targeting annuity purchase and the other “a sort of ‘keeping your options open’ type fund”.

If trustees wish to create a number of tailored strategies to target particular outcomes, it is important for them to understand their membership.

“They must get to know what their members want or need from their investment options, and that the risk-return profile is appropriate,” Ms Denham says.

Multiple strategies not only create complexity, but they can also be a problem if the trustees have limited resources to manage the funds on an ongoing basis.

“The key decision for the trustees is whether members really value having multiple and/or extensively designed lifestyle strategies, or whether the trustees would be better focusing their efforts on one, two or three strategies that meet with the requirements of the majority of members and ensure they do everything in their power to effectively communicate about these,” she adds.

White-labelling can lead to governance benefits

As a result of the investment review, trustees of the Visa Europe scheme have also chosen to use white-labelled funds.

According to the chairman’s statement: “The plan introduced white-labelling into the lifestyles for the first time in 2018 and introduced two white-labelled blended funds.”

These include the Visa Global Equity Fund, “which brought with it a new allocation to emerging markets and alternative weighted equity indexation”, and the Visa Property Fund, which invests in both an existing direct property portfolio and introduces a new allocation to listed property “to manage liquidity within the blend”.

White-labelled funds do not reference the underlying investment management companies. Instead, the underlying funds are bundled together and this custom fund is branded by the underlying funds’ objective or asset class.

A scheme could have its own branded equity fund, for instance, which includes a number of different managers and types of equity fund.

“As well as allowing the trustees to create a really bespoke fund at the outset, the main advantage of white-labelling is that it enables the trustees to make changes to the overall fund on an ongoing basis without seeking member consent each time,” Ms Denham notes.

For example, if appropriate, trustees might swap one underlying manager for another, though members should be informed of any substantial changes to the overall fund, she says.

“It also means they don’t have to change all their scheme literature every time they make a change to the manager as the underlying managers are effectively hidden behind the overarching fund,” Ms Denham adds.

More advice needed for bespoke arrangements

In its investment guidance for DC schemes, the Pensions Regulator stipulates that if trustees think their scheme needs a bespoke arrangement such as a white-labelled arrangement to meet specific requirements for the membership, “you will need to take more advice on these types of products”.

The watchdog advises that in each case trustees should document a clear explanation of their strategy and objectives, and how they expect them to be achieved by implementing a particular bespoke arrangement.

Maria Nazarova-Doyle, principal at Mercer, is a strong advocate of white-labelling. “I think it really is the only way to do DC in the 21st century – the only way to do it efficiently,” she says.

Without a white-labelled solution in place, it can be difficult for trustees to make changes in a lifestyle, such as switching managers or updating the asset allocation.

“It’s very costly, it takes a lot of time, there is disruption to members because you have to have blackout periods,” Ms Nazarova-Doyle notes. But with a white-labelled strategy, “everything happens under the bonnet; there’s no involvement from the scheme administrator”.

If the trustees want to change the asset allocation, they simply need to inform the asset manager for that white-labelled fund.

“It happens on the day – it’s really easy and very cost-efficient,” Ms Nazarova-Doyle adds. “This is the way to ensure that members always stay in the most up-to-date, most modern, most appropriate solution.”

Illiquid assets on the rise in DC

DC schemes, in general, have found it difficult to gain exposure to illiquid assets. Daily pricing and trading for DC strategies have been cited as barriers to doing so.

Liquidity concerns and costs are also seen as a hindrance to DC investment in alternative asset classes, such as infrastructure and property.

The government is keen to boost investment in start-ups and other long-term investments. In February, it published a consultation on the consideration of illiquid assets and the development of scale in workplace DC schemes.

This included a proposal to require larger DC plans to document and publish their policies in relation to investment in illiquid assets, as well as report annually on their approximate percentage allocations to illiquid assets.

The Visa Europe scheme is ahead of the game with its white-labelled property fund, which includes the allocation to an existing direct property strategy and introduces a new allocation to listed property to manage liquidity.

Ms Nazarova-Doyle says it is really positive to see evidence of DC schemes investing in asset classes such as direct property.

Schemes do need to keep an eye on cost. “You have a charge cap, so you need to make sure that whatever you’re adding you’re not just paying lots of fees. You need to really weigh up the costs and not just the fund management costs, but obviously the cost of governance and overseeing these investments,” she says

However, even after costs and fees, Ms Nazarova-Doyle stresses that “private investments and direct investments like this really do add value to defaults over a longer-term investment horizon that most members face”.

Ms Denham agrees: “Generally speaking I think there will be an increase in investments in property with the government’s encouragement to consider this type of investment, as it has advantages in terms of diversifying the portfolio [and] smoothing volatility.”

However, she says that direct investment is likely to be the preserve of very large schemes such as master trusts.