Does your workplace pension measure up? 3 useful questions to ask today

Many workplace pension schemes have a default investment strategy known as “lifestyling”.

Lifestyle investment options are designed to make it easy to save for retirement. As your retirement date draws closer, pension savings are gradually and automatically moved into different funds designed to support how someone plans to take their pension savings. This may be to:

• Keep money invested and take it as and when needed (known as a “flexible income” or “drawdown”)
• Setting up a guaranteed income for life (otherwise known as an “annuity”)
• Taking your money as one or more lump sums
• A combination of these options.

Funds used for those closer to retirement age generally have a lower risk profile.

While pension lifestyling can help to remove the work of managing pension assets, it’s not always appropriate.

2022 was an unusual year in terms of investments

In November 2022, the Financial Times reported that the average value of balanced pension funds had fallen by 11%. With market volatility leading to losses for savers with workplace pensions, the report urged older retirement savers to review their pension strategies.

Many younger savers should see their pots recover from recent market falls, but older savers, especially those close to retirement, may find themselves in a tricky position – especially those with lifestyled funds.

This is because these funds automatically switch savings from volatile assets, such as global and UK equities, to funds that are traditionally less volatile, such as fixed income and cash.

Previously, this action has helped to shield older savers from stock market lows, but 2022 proved to be an exception and fixed income prices and equities each fell.

In fact, Corporate Adviser reports that: “Several funds saw higher losses for their supposedly less-risky pre-retirement default strategy than the strategy they use for younger savers, as a result of the extraordinary movements in the gilt market”.

Those with lifestyled funds approaching retirement would be wise to review their pension strategy. For example, if a scheme member plans to take a flexible income in drawdown, they may be better off adjusting their portfolio to align with their longer-term strategy and appetite for risk.

ESG funds have also changed the lifestyling model

In recent years, many workplace pension schemes have also introduced an ESG (environment, social, governance) option to their plans.

When members change their investment choice to match their values, they may not consider the need for “lifestyling” as they approach retirement. Without professional advice, most people may be unaware of how their pension savings could be managed according to their retirement goals.

It’s clear that ESG investments are here to stay, and they offer many benefits to workplace pension scheme members. However, it’s also important that employees understand all their options and have access to information and resources so they can make well-informed decisions at the most appropriate times.

3 probing questions and proactive steps you can take to ensure your workplace pension scheme measures up

1. How well does your pension scheme provider de-risk funds for members close to retirement?

De-risking strategies should be implemented according to how scheme members wish to draw from their pension.

With the introduction of Pension Freedoms in 2015, a single lifestyling option is unlikely to suit everyone.

Whether members wish to guarantee their retirement income through an annuity, flexibly drawdown their pension fund, or take a series of cash lump sums over time, de-risking strategies should be designed to fit the goal.

For example, for those members wishing to access their pension flexibly, lifestyling is unlikely to be right. This is because it would mean switching their pension to a lower-risk fund that reduces its growth potential – this, in turn, is likely to mean a smaller retirement pot.

This could result in not only reducing the level of income they can take from their pension pot, but also affect its potential longevity.

And it’s not only the loss of growth before retirement that needs to be considered. Lifestyling means that pension savings remain in a lower-risk fund during retirement, which could also have significant implications.

These days, retirement can last for 20, 30 or even 40 years. If people retain their cash in a low-risk fund for decades, it’s likely that they will benefit from lower growth than if they considered holding their investments in medium- or high-risk funds.

2. Does your governance committee challenge your workplace pension provider on investment performance, benchmarking, de-risking, or ESG?

If you aren’t asking your workplace pension provider potentially challenging questions, who is? Left to their own devices, will they be taking appropriate action to ensure suitable returns for your employees and other pension savers?

Should you know that your company hasn’t asked these kinds of questions, find out if your intermediary or pension adviser has.

Workplace pension providers are all governed by The Pensions Regulator and schemes must also have an Independent Governance Committee (IGC). However, this doesn’t mean they provide equal service or investment choices to their members.

If you’d like to understand how your pension scheme provider measures up and how they approach lifestyling options, please get in touch.

3. When did you last review your pension scheme?

As you may have gathered while reading this article, the variety of funds offered through workplace pension schemes have evolved.

If you aren’t sure what fund choices your scheme provider offers or how their fund choices have changed since you first signed up, find out – you may be pleasantly surprised. If not, you may want to look around for better options.

Not only have pension funds changed in recent years, but fees have reduced while technology has advanced.

These days, technology allows workplace pensions to be accessed and managed easily online. The range of functionality between providers varies. Some really embrace the digital journey, making it easier for members to interact with their pension, others less so.

You may also find that a different provider offers the potential for improved fund performance. Plus, some providers offer great services and advice to members at or approaching retirement. Both of which could help make a difference to the lifestyle people can afford when they retire.

Get in touch

Our knowledgeable and friendly team will be happy to review your current workplace pension and advise you on any appropriate changes that may better support your employees.

To find out more or book your next pension review, please email info@second-sight.com or call us on 0330 332 7143.

 

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

 

Secondsight is a trading name of Foster Denovo Limited, which is authorised and regulated by the Financial Conduct Authority.