Private Pension Lifestyling investments - the next scandal?

RogerPensionGuy

A great thread here.

I just think we have come from decades of good DB schemes and mostly until 2015 DC schemes tended to get annuities. 

All very different now.

arnoldy

IMO "fixed" annuities have the potential to be one of the most dangerous products invented by man. A product totally exposed to inflation (which the annuity holder has no control over) and sold as a "safe, worry free" option. What?!  A product designed for longevity risk with no inflation protection, astonishing. Yes you can buy annuities with inflation protection, often they come with a cap, but you are paying so much for that - the rate is less than the current yield of the FTSE All Share and you loose all the capital when the recipient(s) croak.

"Lifestyling" is the enabler. But all the data says that since 2015 the overwhelming majority go for drawdown. And most of those decisions will have been advised by FAs/IFAs themselves. So on the one hand the industry is advising drawdown, on the other hand it is lifestyling as the traditional route to annuity. Go figure. 

The point is that it is usually in the individual's best interests to remain significantly invested, keep costs low, and drawdown a reasonable SWR. 

[Fixed] annuities and "lifesyling" are beloved of the industry, but not necessarily in the best interests of the modern DC pension freedom world. 

Sadly the FCA is asleep at the wheel, as usual. So yes a scandal but one that will not help those involved turn back the clock.

artyboy

RogerPensionGuy said:

A great thread here.

I just think we have come from decades of good DB schemes and mostly until 2015 DC schemes tended to get annuities. 

All very different now.

Agreed. I think those pointing towards the fact that investment decisions are in the hands of the policyholder are both technically correct, and also ignoring the strong emphasis towards annuities when most people my age or older took out those pensions in the first place. 

There was a lot of 'you may want to consider' type non-advice steering people towards Lifestyling because the requirement back then was to take an annuity. What I haven't seen as much of is an awareness campaign by pension providers targeting people in lifestyle arrangements saying that it may no longer be suitable, especially if they do not intend to buy an annuity (which I'm guessing is now pretty niche for DC schemes).

So 'scandal' might be an overreaction, but I definitely think there's a problem here and pension companies should be doing more to make people understand that what was a stone cold no-brainer for them 30 years ago is likely to be the wrong decision today.

Pat38493

The other thing I wonder about here is the role of the employer - I suspect that a lot of employers take the view that once they have set the scheme up and selected a default, that is it - if lifestyling is no longer appropriate for the majority of people, as far as the employer is concerned it’s up to the individual employees to realise this and change their default option.

Assuming I’m correct, when employees sign up to the scheme, they should be told that the default option was the one they selected at a certain point in time and it is the employee responsibility to monitor if it remains a good option for them in the coming years.

On the other hand if the pack says that the employer will review the default option for overall suitability and mass change people if needed, then the employer has some responsibility there.

This is doubly the issue if, like me, the employer has changed schemes several times and just left the old one in place - I highly doubt that my employer is going to proactively attempt to switch off the lifestyling on a scheme that is not even their current scheme anymore.

To add to the confusion in my case, the employee package that came with the current scheme that employees pay into says that lifestyling is switched on, but when I asked Aegon to switch it off, they told me that I don’t have lifestyling!

IdrisJazz

I was in a lifestyling option in one of mf DC schemes, and was very shocked to learn that I had been transferred out of all global equities (in favour of UK equities) as early as TWENTY YEARS before retirement. This was meant to be the riskiest profile, but seems comparatively cautious.

I have left the lifestyling option now, and reinvested a proportion in global equities, and will keep an eye on it as retirement actually starts to get close.

HeyYeah

In the companies I've worked at, you can opt for 'Life styling targeting Drawdown'. I've had three DC pension schemes and each have used a different strategy for this approach.
Pension 1: Similar to an annuity approach, gradually move into Bonds from 10 yrs before retirement
Pension 2: Remain invested as before
Pension 3: Move into perceived lower risk funds such as BG Sustainable Mutli-asset funds, LGIM Diversified etc.
Once again it is caveat emptor. 

m_c_s

Interestingly the NEST series of Retirement date funds do not appear to have any Government Bonds in them. The funds move investments to Sterling Short Duration investment grade bonds as it nears the retirement year. NEST funds focus on Global and UK Corporate bonds with some High yielding bonds thrown in.

Scrudgy

The pensions manager at my company says 98% of staff enrol into the default (lifestying) option when they start with the company. The remaining 2% are on a self select strategy (inc me).

Even people who are in early 30's had a 5% cash element, along with a fairly lacklustre 30% multi-asset fund, 25% in a bond fund, and 20% in each of global and UK equities.

Marcon

Pat38493 said:

The other thing I wonder about here is the role of the employer - I suspect that a lot of employers take the view that once they have set the scheme up and selected a default, that is it - if lifestyling is no longer appropriate for the majority of people, as far as the employer is concerned it’s up to the individual employees to realise this and change their default option.

Assuming I’m correct, when employees sign up to the scheme, they should be told that the default option was the one they selected at a certain point in time and it is the employee responsibility to monitor if it remains a good option for them in the coming years.

On the other hand if the pack says that the employer will review the default option for overall suitability and mass change people if needed, then the employer has some responsibility there.

The majority of people are in contract based personal pension arrangements (not trust-based DC schemes), so the employer can't just switch people en masse as you suggest. Nor is it easy to 'review for overall suitability' since the employer has no means of knowing whether people will finally opt for annuities or drawdown. 

Employers certainly could have a role to help educate, but if you are faced with a workforce who show little interest in pensions (ie most workforces), spending money to provide 'help' which won't be appreciated isn't a good use of funds.

Pat38493 said:

This is doubly the issue if, like me, the employer has changed schemes several times and just left the old one in place - I highly doubt that my employer is going to proactively attempt to switch off the lifestyling on a scheme that is not even their current scheme anymore.

Quite right that they don't. It is likely that somewhere in the papertrail you'll find a warning that people should (a) consider moving funds from the older scheme to the newer one (if still employed with the same employer) and/or a reminder that they can still switch funds around in the previous arrangement. 

The danger of employers being pro-active is an aggrieved employee claiming they 'relied' on the employer's 'advice' to take a certain course of action, without which....there are plenty of such posts on this forum.

leosayer

The reason why government bonds are held in pension funds is because they lock in a certain level of retirement income when buying an annuity. If the value of your bond holding drops 50% but the annuity rates you can buy jump from 3% to 6% then what have you lost?

Interest rate rises seemed inevitable at some point but negative inflation, negative interest rates and a massive jump in bond prices was also a possibility that pension trustees had to guard against. Anyone holding cash yielding 0.2% fixed for 5 years would have felt pretty angry if bond prices jumped 50% and annuity rates dropped to 1.5%.

Of course you may not want to buy an annuity, or you may have other plans for the money and the tax free cash but that's the purpose of the disclaimers which are plastered over every single pension publication - to seek independent financial advice based on your own financial circumstances. 

The time to make sure your savings are suitable for you is when you start saving, not just before you need to use them. Maybe the massive drop in bond prices last year will be a wake up call to pension holders to review their plans but I doubt it.