Private Pension Lifestyling investments - the next scandal?

Troytempest

Firstly, I apologise for my lack of knowledge in this area.....

My company pension (and probably thousands of others) fund has been life styled.  As I understand it the funds were moved into lower risk investments about 5 years out from retirement. This is to protect people from market volatility close to retirement date.

It seems that these low risk investments (Government bonds?) have been more volatile than the stock market resulting in large drops in peoples retirement pots.

Would it have made more sense for these pension funds to have switched the funds into something else (Fixed rate funds?)

Is this going to be the next financial scandal that requires compensation?

dunstonh

My company pension (and probably thousands of others) fund has been life styled. 

Not uncommon where people don't take interest in their pensions and go with the default option.  The default option is often based on annuity purchases.

 As I understand it the funds were moved into lower risk investments about 5 years out from retirement. This is to protect people from market volatility close to retirement date.

Timescales vary on the rate of volatility reduction. Some can start 15 years out.

It seems that these low risk investments (Government bonds?) have been more volatile than the stock market resulting in large drops in peoples retirement pots.

Yes. The last 18 months have been highly volatile and seen over 40% losses in gilts.   You would have to go back over 100 years to see such a scale of change.

Would it have made more sense for these pension funds to have switched the funds into something else (Fixed rate funds?)

95% of the time, no.  5% of the time yes.

Is this going to be the next financial scandal that requires compensation?

Why would it require that?
Whilst gilts have hit fund values, they have increased annuity rates, largely in a pro-rata basis.   So, if you are buying an annuity then you are not worse off.   You are neutral.

If you are not intending to buy an annuity, then you should be looking to select the non-lifestyle risk reduction funds.  This is why your employer and the workplace pension give you choices.    You do not get compensation for the choices you make that turn out to be a wrong call.

MX5huggy

This covers most of the issues.

https://amp.theguardian.com/money/2023/mar/11/pensions-retiring-losses-ftse-aviva-value

Troytempest

Thank you, a good article.

I take the point that employees maybe should take more interest in where funds are invested. BUT, most people are not experts and reasonably assume that the experts who say they are moving funds to low risk investments will do just that.

A rise in interest rates was always going to happen and was well forecast...

Marcon

Troytempest said:

Firstly, I apologise for my lack of knowledge in this area.....

My company pension (and probably thousands of others) fund has been life styled.  As I understand it the funds were moved into lower risk investments about 5 years out from retirement. This is to protect people from market volatility close to retirement date.

It seems that these low risk investments (Government bonds?) have been more volatile than the stock market resulting in large drops in peoples retirement pots.

Would it have made more sense for these pension funds to have switched the funds into something else (Fixed rate funds?)

Is this going to be the next financial scandal that requires compensation?

No. No personal advice was given (so who would be 'liable'?), and it was always open to people to choose other funds.

Pat38493

I don't think there are many fans on this forum of lifestyling - I was listening to the Meaningful Money podcast last week and one of the first tips they gave around building up your pension - cancel your lifestyling so that you are in control of how your funds are invested.

Normally when you join an employer pension scheme, you will be given a pack of information that explains that the default fund is lifestyled and you have the option to move to a different approach (or change your expected retirement date).

Of course I guess that's not much help if it's already been moved.  Also as Dunstoh said, I guess we have seen a once in a hundred years adjustment in gilt/bond values during the last year.  I don't think this was entirely unpredictable that this would happen with rising interest rates, but I think the expectation was that it would be a gradual process and a lot of it happened suddenly. 

One of my DC funds is in a life styling option but I am certainly going to cancel it or move the fund before it kicks in.

QrizB

Troytempest said:

I take the point that employees maybe should take more interest in where funds are invested. BUT, most people are not experts and reasonably assume that the experts who say they are moving funds to low risk investments will do just that.
A rise in interest rates was always going to happen and was well forecast...

The key to understand is that many default lifestyle plans are intended to make funds avaialble to buy an annuity.

As dunstonh points out, falling gilt prices might mean the value of the pension pot falls, but the very same factor means the value of the annuity it can buy will remain more-or-less the same.

you haven't yet said whether you intend to buy an annuity, or take one of the other options. What are your plans for this pension?

dunstonh

A rise in interest rates was always going to happen and was well forecast...

Interest rates were forecasted to rise from 2011.    So, the 10 years from 2011-2021 would have had virtually zero returns if in cash.  This is what gilts did in the same period.

The problem with hindsight is you don't have it until after the event.   

During that period above, if they had lifestyle risk reduced fully into cash, the person would have got zero return. 

And here is the whole period to date:


The bottom line is that no-one expected gilts to unwind as quickly as they did and no-one knew when it would start.  They thought QE could be eased off slowly and the impact spread.

Lets throw in UK equities....

What if you were retiring in 2011 or 2016 or 2020 and had not lifestyled?   Would those people be asking for compensation if they were not lifestyle risk reduced?

Nobody knows.  This is why the risk warnings exist....should you choose to read them.

Troytempest

Thanks all,

That is the upside - I do have to buy an annuity to cover the GMP and this is a lot cheaper than it was even 6 months ago...

Steve_666_

Troytempest said:

Thank you, a good article.

I take the point that employees maybe should take more interest in where funds are invested. BUT, most people are not experts and reasonably assume that the experts who say they are moving funds to low risk investments will do just that.

A rise in interest rates was always going to happen and was well forecast...

Low risk, does not imply zero risk.

RogerPensionGuy

dunstonh said:

A rise in interest rates was always going to happen and was well forecast...

Interest rates were forecasted to rise from 2011.    So, the 10 years from 2011-2021 would have had virtually zero returns if in cash.  This is what gilts did in the same period.

The problem with hindsight is you don't have it until after the event.   

During that period above, if they had lifestyle risk reduced fully into cash, the person would have got zero return. 

And here is the whole period to date:


The bottom line is that no-one expected gilts to unwind as quickly as they did and no-one knew when it would start.  They thought QE could be eased off slowly and the impact spread.

Lets throw in UK equities....

What if you were retiring in 2011 or 2016 or 2020 and had not lifestyled?   Would those people be asking for compensation if they were not lifestyle risk reduced?

Nobody knows.  This is why the risk warnings exist....should you choose to read them.

What a great informative and easy to understand post, it's a shame not all pension or financial providers and platforms are not always as 50% as good as this post.

Thanks for posting.