DC Pension Lifestyling risks

HeyYeah

I was interested to see the following article in the guardian regarding the large drops in DC pension values for those near retirement and using the lifestyling approach. In this case someone about to retire found out that his pension had lost 24% over two years after being moved into bonds. As he says  “I was not aware [I was being placed mostly into gilts], and anyway – I suspect like most people – would not have known the implications, given their repeated statements about low-risk investments.”

Plus the lifestyling approach differs from pension to pension. I have three pensions and each has a completely different approach, so you have to spend a lot of time to work out what's happening with each pension, reading the small print.

I think we'll start to hear more and more stories like this about DC pensions, especially with these kinds of automatic investment changes. Since the lifestyle pension is usually the default choice, people assume it is the safest and recommended (I know 'recommended' is a loaded word!).

artyboy

But as has been said before, Lifestyling is aimed at those who intend to buy an annuity. In that case, the shift to bonds wouldn't have mattered because it would have tracked annuity prices. The issue becomes where people misinterpret Lifestyling as being suitable for drawdown, which it isn't.

So I guess it will come down to whether any pension company's literature could be argued not to be clear enough on that point. 

Of course, if you are looking at using the fund for drawdown, a 24% drop is hardly the end of the world either given you would expect to remain invested for 20/30/40 more years through retirement. But staying in bonds is unlikely to be the best long term strategy.

ewaste

Wilful Ignorance on the part of many when it comes to Pensions as the regulars on this board are well aware. I always find it interesting the willingness by some to pay often hundreds per month into a "Pension" without knowing or caring in the slightest what that actually means. 

“A few years ago Aviva noted in their annual statement that as I was then approaching retirement age, my pension was being moved into safer investments (its lifestyle investment programme),” he recalls. He was told this meant “your pension fund is moved from funds with a greater exposure to the stock market into more cautious investments. This helps reduce your exposure to risk from stock market fluctuations.”

Surely you'd wonder why you were receiving such notification and look into it, what "safer" and "lifestyle" actually meant was probably explained in the paperwork somewhere. 

Pat38493

How long before there is some kind of further pensions scandal due to either the government or regulators failing to keep their guidelines and rules up to date with new reality - I think they are mandated to communicate things in certain ways which end up actually being misleading with the new pension freedoms, and in the worst case actually sound like they mean the opposite to what they truly mean for you as a prospective pensioner.

gm0

Two swallows do not make a summer

Facts are what they are on bonds but the accompanying analysis and FTSE100 comparison (as if that's a sensible holistic pensions investment). And the complaint prompt at the bottom.  All nonsense from the Guardian. But far from untypical of broadsheet coverage of pensions let alone radio or tabloid or youtube clickbait. 

Ros Altmann's warpath on unsophisticated annuity focused derisking hanging around as a default - now drawdown is a majority sport - is fair enough so far as it goes.  Some schemes are doubtless asleep at the wheel keeping up with modernisation.  And having lifestyling for a drawdown target setup and communicated well.

But it's a massive oversimplification to suggest that the reason lifestyling exists had gone away to never return
With interest rate cycle annuities may find their place expanding again.  Regulatory changes also play in.

Deleting features of the system which were created to protect the annuity purchase path is highly presumptive. 
Moving the default default towards drawdown makes some sense - for the moment.
At the time lifestyling was created. Drawdown didn't yet exist.  What will the system be in 50 years ?

Many lifestyling schemes started out with variations on a 10 year progressive % de-risking from equities to gilts/bonds. 
And some later added more than one version of lifestyle auto investment changes. To reflect drawdown and alternative targets alongside annuity. All being aimed at those that don't want to self manage during working life.  Set and forget.

For drawdown preparation the reduced de-risking reflects staying invested in retirement. 
Bonds are still purchased and equities sold for those drawdown versions.  From 100% down to around 40% equities at early retirement age in the example I know best. 

Which is fairly mainstream thinking on long term deaccumulation portfolios, sustainability etc.
Albeit at the cautious/conservative end of the spectrum in terms of growth assets. 
Cautious is probably appropriate for a "default" option which is aimed at people not being advised or working via self study to a level where a personalised choice of retirement portfolio has been made (which may still turn out good or bad).

Post Maxwell. UK Pension scheme trustees are not in the active portfolio management game.  And ask the Enron pensioners how that went for them.

Media coverage falls to the lowest common denominator.  Find a "victim" group in sackcloth and ashes.  Stoke outrage about a poorly understood apparent injustice (which may be normal economics, just poor timing or luck and a temporary thing or not). 
Next step find a "them" to critcise for permitting this terrible injustice.  Choose from illuminati, tories, eu, 1%, the liberal left blob, or others politically to the editorial taste for denunciation.

And the usual category error mistake in lots of coverage of thinking the tax wrapper operator is responsible for the underlying investments.  Or should be.

D-  Must try harder

Albermarle

artyboy said:

But as has been said before, Lifestyling is aimed at those who intend to buy an annuity. In that case, the shift to bonds wouldn't have mattered because it would have tracked annuity prices. The issue becomes where people misinterpret Lifestyling as being suitable for drawdown, which it isn't.

So I guess it will come down to whether any pension company's literature could be argued not to be clear enough on that point. 

Of course, if you are looking at using the fund for drawdown, a 24% drop is hardly the end of the world either given you would expect to remain invested for 20/30/40 more years through retirement. But staying in bonds is unlikely to be the best long term strategy.

As also said before and Gm0 also mentions, there are drawdown lifestyling options available in workplace and other pensions. In some cases now the default option 
The problem is historical legacy of annuity lifestyle funds being the default for many years, even when they were largely inappropriate in recent years. Probably clients were informed that there were alternative lifestyle fund choices, but either threw the info straight in the bin ( boring pension stuff) or deleted the e mail.. Probably some read the info and did not understand it and some maybe understood it but never did anything about it.
Cue recent issues with bonds and many unhappy customers calling the provider.
My last employer pension, which I have kept going for now, just last month informed me that the default lifestyling profile was being changed to drawdown( it does not affect me as I switched out of the option some years ago)
A clear case of shutting the stable door after the horse has bolted.

tacpot12

The pension providers really can't win while people won't even try to understand their pensions. Lifestyling was OBVIOUSLY going to be wrong for some people, and yet the regulator allowed it to happen. It would have been MUCH better to force clients to manage this themselves rather than the pension providers trying to make it easy for the lazy ones.