The decision by FuturePlanner, Leonardo-Finmeccanica’s defined contribution pension scheme, to replace two gilt funds with annuity protection funds despite significant structural overlap, raises questions about the extent to which DC restructuring may just be rebranding.
The trustees of the engineering giant’s £82m DC scheme told members that, from July 1, changes would be made to FuturePlanner’s 'Pick & Mix' investment fund range, following a fund review by trustees and investment advisers.
The best you can do as a trustee is to communicate and make sure members know all their options
Niall Alexander, P-Solve
The changes will involve removing two existing funds, the government bond fund and the government index-linked bond fund, and replacing them with a fixed annuity protection fund and an inflation-linked annuity protection fund.
As of this month, FuturePlanner’s Pick & Mix range will consist of five funds: the two new annuity protection funds, a global equities fund, a cash fund, and a corporate bond fund.
The trustees’ statement explained that the two existing funds were being removed because they overlapped “significantly” with the new products being offered and had had “low take-up”, in addition to the new alternatives being more suitable for those seeking to purchase annuities at retirement.
However, the significant overlap between the old and new funds raises questions about what, if anything, will really distinguish the new funds from the old, besides their names.
A bit of a minefield
Niall Alexander, co-head of DC solutions at P-Solve, which acts as fiduciary managers for FuturePlanner’s default fund and adviser for its Pick & Mix funds, said the fixed annuity protection fund will invest 32 per cent in gilts, with the remainder in corporate bonds; and the inflation-linked annuity protection fund is 55 per cent in inflation-linked gilts, with the remainder in corporate bonds.
He added that “these percentages will vary over time as the investment manager makes changes to better reflect trends in annuity pricing”.
Alexander explained that for the trustees, the alterations were not about “redirecting” funds away from gilts, but “about moving gilts into a better vehicle”, as take-up for the old funds was low.
Alexander conceded that there is a risk that DC members do not always understand what is in their pension’s best interest, and that accommodating members’ wishes “is a bit of a minefield for trustees”.
“The best you can do [as a trustee] is to communicate and make sure members know all their options,” he said.
What it says on the tin
Martin Flavell, who chairs FuturePlanner’s trustee board, said that the fund change was made “because it would be simpler [for members] to understand [the options open to them]”.
“We were advised that these funds would potentially match subsequent annuity purchases more closely,” he added.
The two annuity protection funds were designed as “ready-made” funds “that essentially do what they say on the tin”, allowing members to do less “constructing” on their own, Flavell explained.
He said: “The funds were reviewed in light of changes around freedom and choice,” and the alterations were accompanied by individual communications to each member currently invested in either gilt fund. The scheme’s trustees obtained member feedback and held briefing sessions throughout the process, Flavell added.
Spread risks beyond bonds
Andrew Cheseldine, partner at consultancy LCP, said that FuturePlanner’s changes “make absolute sense”, considering how poorly bond funds have tracked annuity price changes recently.
He said that “a mix of credit investments more closely matches annuity prices”, rather than a pure gilt fund. Gilts are a sensible investment, he remarked, only for those looking to buy an annuity, as their yields are currently very volatile.
However, he added, annuities have got much more expensive in recent weeks, and demand might drop for a while.
Cheseldine said that index-linked gilts offer better “protection against future inflation” than standard gilts, so increasing their proportion in a fund was a sensible strategy.
“It is hard to imagine gilts falling lower than they are now,” Cheseldine said, adding that a point in their favour is that they are still a good diversifier.
However, he noted, other options such as emerging market debt, must also be kept in mind. “If you are a DC investor, you will want to spread risks beyond the bond markets.”
