The introduction of auto-enrolment (AE) in October 2012 means roughly eight million new savers will join a workplace pension scheme by 2017. Pension freedoms have given members a great deal more autonomy around what to do with their pension pots, and while guidance will be offered to those aged 55 and over in the form of the ‘Pension Wise’ website, many employees will likely turn to their employer for advice.
HR professionals have been faced with myriad changes; all of which are accompanied by reams of material needing to be digested, translated and communicated to members. However, if the buck now stops with HR, it is also the responsibility of the investment industry to give them the (jargon-free) tools required to ensure they can communicate to members effectively, and get as many over the ‘retirement finishing line’ as possible.
One of the trends emerging from this changing pensions landscape is the move toward target date funds (TDFs). Currently the majority – around 85% – of scheme members go into a default fund. The most common default is a ‘lifecycle’. We believe this structure is no longer the best solution for maximising the number of members positioned for retirement success.
Defaults are often too mechanistic, inflexible and confusing, delivering too wide a range of outcomes i.e. a large variance in retirement pot sizes. TDFs, with their in-built flexibility, well-diversified approach, and simplicity of message for members, are best placed to weather the journey to retirement.
Communication to members in a TDF is comparatively simple – the name of the fund is the year closest to when a member thinks they’ll retire. This leaves HR to focus on what matters most: improving savings rates and helping members get retirement ready.
This should be done well before the guidance guarantee is provided and can be delivered through segmented engagement approaches (different messaging to different cohorts, such as age ranges) and should perhaps include a more holistic approach where debt and life events are brought into consideration and planning.
Over the coming years, DC investing is likely to represent many people's best chance to maintain their standards of living in retirement. It is vital that companies make the right choices for their DC defaults to ensure as many members as possible can actually retire.
Simon Chinnery is head of UK defined contribution at JP Morgan Asset Management
