HSBC Pension Scheme plans to default members of its defined benefit section into its cash lifestyle fund following the closure of the section in July next year, as it reviews its defined contribution scheme following March's Budget reforms.
The Budget, which gave people more freedom in how they access their retirement income, has left DC schemes considering what their default investment strategies should be aiming towards, as well as the prospect of DB members transferring in to take advantage of the same flexibilities.
The HSBC scheme, one of the largest DC plans in the UK, introduced the cash lifecycle at the end of last year – which derisks completely into cash as members approach retirement – for its 3,500 DB members paying additional voluntary contributions into its DC section.
We are going to have lifestyles, cycles we call them, that go to cash and also go into a drawdown
Mark Thompson, HSBC
The scheme has between 8,500 and 9,000 members in its DB section, which will be transferred to DC in July next year.
Speaking at State Street Global Advisors’ DC’s Light Bulb Moment conference this morning, Mark Thompson, chief investment officer at the scheme, said more than 90 per cent of these members took this as tax-free cash.
“I know that the scheme closed to new members in ’96, so these people have been with the bank since ’96 and in the DB scheme for nearly 20 years,” he said. “I’m going to default them into the cash lifecycle; that’s probably more likely they’re going to be taking, they’re in their mid-50s, as their tax-free cash.”
Previously a lot of these members were in a lifecycle fund, which assumed they would derisk into “long-bonds”, Thompson said.
The scheme’s current default fund assumes members will purchase an annuity at retirement. “But we are going to have lifestyles, cycles we call them, that go to cash and also go into a drawdown,” said Thompson.
The company contributes 10 per cent for the first £20,000 of a DC member’s salary, 9 per cent after this amount and a further matched contribution of 7 per cent.
Seventy-two per cent of members make a matching contribution, Thompson said. “One of the things that’s very difficult when you’re running a pension scheme is you almost assume these people are with you from the age of 25 until whenever, but they’re not. They’re all in different schemes; you don’t know what else they’ve got.”
Mark Fawcett, chief investment officer at state-sponsored mastertrust Nest, told delegates it chose to default members into a target date fund in 2009 due to the complexity around lifestyling and to keep the asset allocation dynamic.
“Now we’re extremely grateful we made that decision because now changing the glide path, changing the asset allocation, the target asset allocation is going to be so much easier once we’ve decided what the end path should be,” Fawcett said.
Andy Cheseldine, partner at consultancy LCP, said defaulting members that have contributed AVCs into a cash lifestyle fund is a common reason.
“Quite often if you’re in a DB scheme and you make additional contributions it’s quite probable that the trustee and employers have said you can take 100 per cent, as that is part of your lump sum,” he said.
Schemes may also choose to default members into a cash lifestyle who have made lower contributions, or those that are due to retire within a relatively short time period and therefore have not been part of a DC scheme for very long.
