IBM is offering greater flexibility to members in their investment choices, with higher and lower risk decumulation strategies available from May
Use member data to design funds;
Provide information about the practical outcomes of funds for members;
Target education strategies to an age bracket;
Don't neglect the regulator's six principles of defined contribution governance.
The IBM defined contribution (DC) pension scheme has replaced its default fund with two Lifecycle options to give its members greater flexibility as they approach retirement.
These strategies offer a different level of investment risk for members approaching retirement, in accordance with their savings pot.
The scheme is also adding eight funds to its self-select Freestyle option for members who want total control over their investments.
Schemes are improving member choice to better cater to their retirement needs. This is especially important at a time when annuity levels are at historic lows.
They are also making efforts to ensure people understand their retirement options so they are able to take the most appropriate level of investment risk.
IBM's plans
From May, IBM's DC members may opt for the Lifecycle strategy, which takes lower levels of capital risk in the years approaching retirement.
The other strategy, Lifecycle Plus, provides members with higher levels of capital risk in the 15 years approaching retirement.
It is primarily aimed at members who already have a defined benefit pension or other investments, so can afford to take more risk.
The eight new funds in the Freestyle range allow members to self-select from a list of Legal & General products.
A spokesperson for the IT company said: “As part of a recent review, IBM has refreshed the pension investment options by adding new funds which members can choose.
"It has also extended the existing investment options for members, therefore giving employees more flexibility.”
IBM’s strategy is an example of how DC schemes can offer members flexibility in a difficult retirement income market.
It’s unrealistic to expect people to understand the nuances between what a bond, gilt and equity are
Philip Smith, head of DC at Buck Consultants, said offering member choice was especially important when annuity prices were at historic lows.
“Right now with gilt yields on the floor, it’s a terrible time to be annuitising," he said.
"[These strategies] give people the option to position themselves, so if they do want to go into drawdown and take a transfer, they have their assets in the right kind of shape."
Member communication was vital and schemes should be very clear with people what their retirement options were, he added.
Smith said: “There needs to be a member education push once members hit 50 – an age-targeted approach that gets people thinking how they’re going to derive their income."
Personal element
Schemes can use member data to shape communication campaigns and ensure any funds meet the requirements of the members.
Nigel Aston, business development director at DCisions, said schemes should not focus on providing a breakdown of funds.
Instead, they should provide information on what those funds would offer members.
Schemes could analyse member data and distil the information into the design of the fund
He said: “It’s unrealistic to expect people to understand the nuances between what a bond, gilt and equity are because that’s really complicated."
Risk-graded funds, bespoke to the types of people in the scheme, would make it easy for people to decide on their investments, he said.
Schemes could either analyse member data, or hand out questionnaires and distill the information into the design of the fund, Aston advised.
But there is a danger schemes could become more interested in the structure of funds than how they impact upon individual members.
Last year, the Pensions Regulator set out six guidelines on good DC member outcomes.
These required schemes to set a suitable default fund that has sufficient protection against loss of savings.
They also included a requirement to communicate with members to ensure they can make informed investment decisions.
