T Rowe Price bucks trend with DC lifestyle equity exposure

But the strategy is very rare in UK schemes as it places investment risk in a member's pot at a time when they have little or no time to recoup any losses.

The fund is 20 per cent invested in equities when the member gets to retirement. This is in stark contrast to the majority of other UK schemes, which do not have any equity exposure when the member retires.

UK default funds are typically made up of bonds and cash.

The strategy employed by T Rowe Price, which has just 189 UK employees, follows a more standard US investment strategy where members stay invested in equities after retirement.

“We have done a lot of research in the US on target date funds,” said Tim Bird, chair of T Rowe Price’s UK pension scheme and head of its institutional business in UK and Ireland.

“One of the things we do as a trustee group is make people feel empowered about their investments. It is part of the communication process.”

Members who are invested in equities at retirement are able to take advantage of stock market rallies for longer but they also leave a portion of their assets exposed to investment risk.

Counterintuitive asset mix

According to Towers Watson’s 2012 FTSE 100 DC survey, the typical lifestyle fund at retirement is invested in bonds and cash (see box).

The only time we see UK schemes going down that route is when they have a US parent

Chris Smith, Towers Watson

This strategy is used to track the expected price of annuities, which most UK members will buy at retirement, having taken a 25 per cent tax-free cash lump sum.

But in the US, very few members buy annuities at retirement. They typically stay invested in a drawdown product while taking an income, so remaining in equities in retirement is usual.

“The only time we see UK schemes going down that route is when they have a US parent,” said Chris Smith, senior investment consultant at Towers Watson.

“I think it is missing the point of what the derisking is trying to do, which is track annuity prices.”

Bird said the majority of T Rowe Price’s UK employees were expected to go into a drawdown product rather than buy an annuity at retirement, so the default asset mix was a better match for their needs.

But Smith argued it may not be in all members’ interests in having so much investment risk at the retirement stage. This was because not all members – despite working for an investment company – would necessarily be financially savvy enough.

However, Bird countered that members were not forced into the strategy. “It is important to state that the default fund is a choice people make,” he said.

“It is just one option that people make. People can choose their own mix.”

Length of glidepath

Another major difference between US and UK DC default strategies is the length of the derisking period, also known as the glidepath.

If trustees do not believe in DGFs, they have to believe they are better at making an asset allocation decision than the asset manager

Graham Mannion, DCisions

According to this year’s DCisions report on DC strategies, the average derisking timescale for UK schemes is 9.6 years, up from 7.9 years in 2007.

But in the US there is a much longer glidepath, with a gradual phase of derisking throughout the whole life of the fund.

UK schemes are increasingly introducing derisking earlier by replacing equity funds with multi-asset funds.

These types of products aim to replicate equity returns but with lower volatility. The DCisions report showed 32 per cent of UK schemes now make use of them, up from 12 per cent four years ago.

There is a big variety in the types of multi-asset funds, with each one having a different aim and asset mix.

But Bird said T Rowe Price did not offer such products and the pension scheme did not include them in its default fund.

“Defined benefit is all about diversification and DC schemes try to imitate this by moving into diversified growth funds [a type of multi-asset fund],” Bird said.

“But if you only use one fund you are just substituting market risk with manager risk.”

However, Graham Mannion, managing director of DCisions, added: “If trustees do not believe in DGFs, they have to believe they are better at making an asset allocation decision than the asset manager.

“If they are concerned about manager risk, it does not follow that they have to use just one fund. They could use a number of different DGFs.”