Nest to switch TDF goalposts from annuity purchase as April looms

Delegates at Pensions Expert's defined contribution investment forum yesterday discussed the impact of the Budget's pensions tax changes on investment strategies, the annuities market and member communication.

“People don’t tend to annuitise unless they have to,” Nest’s chief investment officer Mark Fawcett told the audience. “Therefore… targeting annuitisation and an annuity-tracking asset allocation at 65 is probably not the right way forward,” he continued. 

"So we are looking at our investment strategy – for the target date funds that had been targeting annuitisation, we'll be amending that." But the scheme would not "jump to conclusions" on an alternative, given its first wave of pensioners will likely take cash.

The scheme will be launching a consultation on Monday, focusing on the upcoming changes to the DC landscape and the shifting needs and behaviours of its savers.

Guy Stern, head of multi-asset and macro-investing at Standard Life Investments, said that because risk has been transferred from the sponsor onto the saver with the switch to DC, “the fiduciary duty falls upon us”.

The panel agreed that the needs and desires of members should be met, but also managed carefully. “People just don’t know what they need at retirement, so making an irrevocable annuitisation decision is probably not the right thing for most people at 65,” Fawcett said.

The reforms have led some industry commentators to argue savers will remain in growth assets in the last decade before retirement, rather than mechanically derisking into an annuity-tracking portfolio.

When asked about what other DC pension schemes should ask themselves in terms of their investment strategy before April 2015, Fawcett highlighted the importance of risk management.

"You should be managing the risk of a portfolio from when people start saving in their early 20s, right through into retirement if they carry on investing.”

When it comes to its youngest members, Nest has a lower-volatility approach, based on the belief that if faced with market volatility, scheme members are more likely to stop saving. This would have a more drastic impact on their outcome than any underperformance of a less risky strategy.

Stern challenged this: “Maybe we’re controlling a risk that doesn’t need to be controlled? Market-to-market volatility for someone who’s saving for the next 40 years isn’t really all that important."

He added: “In the decumulation phase it’s very important to control the daily volatility of the portfolio, much more so than in the accumulation phase."

However, the introduction of auto-enrolment and opening up more routes for DC investors to take after retirement does not guarantee a smooth ride.

David Harris, managing director at Tor Financial Consulting, pointed in a presentation to the situation in New Zealand, which provided the blueprint for auto-enrolment in the UK.

“[It] is stuck on contribution levels of 3 per cent by the employer and 3 per cent by the employee and individuals think, believe it or not, that that’s the appropriate level of contributions,” he said.

Harris added that a lack of government response in offering tax incentives for annuities in the country has led to a total collapse of the market – from three annuities bought over the entirety of 2013 to none at all this year. "So be careful what you wish for in the UK,” he concluded.