The Specialist: Changes at EY are aimed at reconciling its scheme with the pension reforms and could provide an opportunity to engage members.
The reforms that came into force in April last year have led many DC schemes to review and alter their investment options to suit the different retirement choices of drawdown, annuities and cash, as well as reconsider how to optimise outcomes.
Clive Ward, chairman of EY Trustees, said in a newsletter to members that within this new pension environment the scheme has worked with its advisers “to understand how members’ saving and retirement behaviours may change, and review what we can offer”.
Following the review, trustees decided to help members better align their investment choices with their attitudes to risk and how they plan to access savings.
The scheme, worth roughly £596.6m, decided not to offer the full range of flexibilities due to its underpin while it was contracted out of the state second pension.
The majority of the pension plan’s members – 1,531 of which are active and 8,476 deferred as at September 2014 – invest in the lifestyle option, which allows them to follow a preset investment strategy.
For this reason, “it’s particularly important that the lifestyle strategy reflects regulation in the wider pensions markets and is appropriate for our members”, trustees said in an announcement to members.
Before the changes took place, the plan’s lifestyle option included an ‘accumulation phase’ and a ‘protection phase’. The accumulation phase was made up of a global assets fund, while the protection phase included a passive corporate bond fund, a passive fixed-interest gilts fund, a passive index-linked gilts fund and a money market fund.
Members could choose when their switching took place – either five or 10 years before their target retirement age.
From June last year, the plan split the options across two new phases that align with how far away members are from retirement.
Up until eight years before their target retirement age, the ‘build’ phase allows members to make choices on how they would like to grow their savings, linked to their attitudes to risk.
The ‘connect’ phase, which starts eight years before the planned retirement age, allows members to link their investment choices to how they want to take their savings as they move closer to retirement.
One of the changes EY has made within the new ‘build’ phase involves mapping investments to a growth allocation depending on how far members are from retirement.
“This allows for greater exposure to risk (with greater potential for reward) while you’re a long way from retirement than the current default offers,” states the announcement.
Increased engagement
“The changes EY implemented seem sensible and in line with others,” says Lydia Fearn, head of DC and financial wellbeing at Redington.
She says implementing changes related to the pension flexibilities can be “a real opportunity to engage the membership” and “help members understand if they are on track or need to save more”, while engaging older members to seriously consider their options.
Fearn admits that “freedom and choice certainly has added complexity”, leading to trustees and governance committees needing to look even more closely at their DC schemes.
However, for members, “it is a way for them to feel closer to their longer-term savings and have control over what they can do with those savings when they choose to – a real financial empowerment”.
Communicating change
Fearn says it is important for younger scheme members to be exposed to investment risk.
She advises caution with regard to attitudes to risk in the early stages of building a retirement savings pot. While younger members may prefer a low-volatility portfolio, “it is important they take a reasonable amount of investment risk to help build up their savings and make every penny they invest work hard for them”, she says.
“Our view is that too little risk is as bad as too much. So getting the balance right is important. This doesn’t mean the investments can’t be diversified and spread across different asset classes, but a higher level of investment risk can have the potential to lead to a better overall outcome for the members,” Fearn explains.
“As part of that design, the derisking phases need to be considered carefully,” she says, adding that the timing of the derisking process is important.
She says that a disadvantage could be that if members do not completely understand the level of risk they are exposed to, and they see falls in the value of their savings, they may become anxious.
“However, this can be mitigated through communication that retirement savings are a long-term investment a member can’t touch until at least 55,” says Fearn.
Communicating with members is high on the agenda for trustees of the EY pension plan. According to the correspondence to members, the trustees recognise that the constantly changing world of pensions can make retirement planning and decision-making very challenging.
As a result, the scheme has decided to start running webinars for members to support them, and it plans to provide more of its communications, including newsletters, online.
Chris Roberts, trustee representative at professional trustee company Dalriada, says that when it comes to gearing DC strategies towards pension freedoms, the greatest challenge is getting members to engage.
“It is not a new challenge, but we are yet to see it properly cracked,” he says. The increased amount of choice brought by the pension freedoms “brings the need to make more decisions in a market where the majority of processes are set up in the expectation of inertia”, he notes.
Roberts says provided trustees have the right systems and team; it should not be difficult to make the kind of changes EY has carried out.
Sophisticated solutions
The EY trustees have also adjusted the scheme’s freestyle strategy, where members are able to select the investment funds themselves. One of the changes included altering the allocation of the scheme’s Global Asset Fund from 60 per cent active equity and 40 per cent diversified growth funds to an even split between passive equities and DGFs.
According to the member announcement, “the move from active to passive equity helps to reduce the cost of the fund to comply with new legislation on fund charges”.
In addition, “a 50/50 mix provides a more balanced approach to different growth asset classes”.
Ian Aylward, investment director at DC and communications consultancy Punter Southall Aspire, says an increasing number of DC schemes are selecting DGFs for their freestyle strategies.
“Outside the default you’re not fee-constrained with the cost cap and so you can have more costly funds, more sophisticated funds in there, such as DGFs,” he says.
Within default options, and due to fee caps, “you’re seeing relatively vanilla multi-asset offerings” because DGFs are typically more expensive.
DGFs are more sophisticated and offer higher expected returns over time, “and so you are seeing [more of] them come into the self-select” options.
Referring to the changes EY has made, Aylward says “we’re seeing this across the industry… it’s all flowing from the move to freedom and choice”.
He adds that given the extra flexibility, “schemes are having to adapt and make options available because each individual member would have different preferences as to what they want to do at retirement”.
Sophia Imeson is a reporter at Financial Times publication MandateWire
