Target date funds can be as flexible as members require them to be, says Nest’s Mark Fawcett, as he explains how the government-backed mastertrust has implemented its fund structure to meet evolving needs.
We would argue that changing retirement patterns, coupled with the new pension freedoms, make target date funds a potentially agile way to respond to savers’ shifting needs.
People do not always know what their plans and spending patterns will be throughout retirement. What we do know is they are unlikely to be fixed
Not all schemes may have altered their derisking strategy in light of the new pension freedoms. However, Nest has been able to deploy its target date structure to change the shape of the glidepath coming up to retirement with relative ease.
The freedom and choice reforms have posed a conundrum for providers of pension savings. Previously many, including Nest, would derisk into annuity-tracking portfolios.
In light of the reforms and research into our members’ needs and aspirations, we know this is unlikely to be the choice for most of our members in the long term.
For this reason, the primary objective of the derisking, or consolidation phase, for Nest retirement date funds maturing after 2020 will be to outperform CPI after all charges. The funds will aim to do this while also reducing volatility as a member’s fund approaches maturity.
This change to the consolidation phase reflects the new reality following government reforms. As we have noted in our consultation on the future of retirement, it’s unlikely members will want to convert their whole pot into an annuity in the early years of retirement.
At this stage, people do not always know what their plans and spending patterns will be throughout retirement. What we do know is they are unlikely to be fixed.
Adapting to change
A member’s circumstances may well change as they get close to state pension age, when their retirement date fund would be due to mature. If they want, they can simply tell us they want to push this date back.
Members will still benefit from age-tailored risk management without having to engage to any great degree.
This is a much more straightforward proposition than changing a set lifestyling framework that makes automatic switches between assets. This has been the derisking strategy of choice in traditional defined contribution schemes.
Target date fund structures lend themselves to trustees meeting their responsibilities to act in their members’ best interests in thoughtful, yet responsive ways. Such structures also support dynamic risk management approaches that can be implemented cost-effectively and efficiently.
If done right, they provide better value for money and flexibility than other methods of transitioning savers from growing to accessing their pots.
The freedom and choice regime is still in its early days. No one can predict exactly how members will respond to the new freedoms, so we will keep our derisking approach under review as the market develops.
The beauty of the target date fund structure is that it affords schemes the sort of responsiveness that meeting members’ needs in the new framework may require as it matures.
Mark Fawcett is chief investment officer at the National Employment Savings Trust
