Feature
depending on the investment strategy the DC provider pur- sues, but also on the amount of support that has been put in place for members approaching retirement.
Under the bonnet
When comparing DC retirement-date funds, even within the master trust landscape, it is worth noting that it will inevitably result in comparing apples with pears because every provider approaches the retirement stage differently. Nest, for example, has funds for each year of retirement. Its 2022 fund is for members due to retire this year, whereas Now Pensions only has two main investment strategies – the growth-oriented Diversified Growth fund for younger mem- bers and the Retirement Countdown fund for older members. Nevertheless, it is striking that the asset allocation and subse- quent investment performance can vary significantly from provider to provider. Nest’s Guided Retirement fund, for example, is aimed at members aged between 60 and 70. It still has significant exposure to growth assets, but members allocate only a pro- portion of their savings into the fund, the rest is kept aside for
emergencies. The Guided Retirement fund still has a quarter of its assets exposed to global equities and 19%, its second largest holding, in global high-yield bonds. It also has a 13% allocation to hybrid property funds, but no investments in gilts. The fund is down -6% this year. In contrast, TPT Retirement Solutions 2020-2022 Target Date fund has about half its portfolio invested in gilts, roughly a quarter of those are inflation linked. It still has a 17% exposure to global developed equities. Since last year, the value of the fund has dropped by -2.8%. The People’s Pension’s closest comparator is the Pre-Retire- ment Fund, which, however, is aimed at members just before the retirement stage. Members start transitioning into the fund from 15-years prior to retirement and will be 100% invest- ed by the time they reach retirement. After that, they can either switch to cash or an annuity.
The sell-off in gilts has meant that older pension savers invested in defined contribution pre- retirement funds might have noticed a dip in fund values, which will have an impact on individuals if they intend to retire imminently.
Jon Cunliffe, The People’s Pension
Its biggest holdings are money market funds at 20%, US treasuries at 18.6%, followed by US equities at 9.7% and 9.5% each in gilts and UK corporate bonds. Since last year, the fund is down -9.6%. Meanwhile, LGIM’s Pre Retirement fund, which is also aimed at members approaching retirement, invests in a combination of gilts at 34.6%, utilities at 10%, UK financials corporate debt at 8.5% and consumer services corporate debt. As of June 2022, its value had fallen by -19.5% when compared to the pre- vious year. Now Pensions Retirement Countdown fund is aimed at mem- bers before retirement. Once they retire, they will be expected to convert their savings into cash, which makes risk reduction all the more important, as Emma Matthews, head of invest- ment at Now Pensions explains. “The Retirement Countdown fund is focussed on minimising the risk of capital loss (risk objective) and to deliver a return equal to the Sterling Over- night Interest Average (SONIA) rate, consistent with the pres- ervation of capital return objective. As a result, the fund will typically invest in the money markets, cash deposits and short- dated bonds.” At the time of writing, its entire portfolio has been invested with Blackrock’s Liquid Environmentally Aware fund, which is a money market fund. As of July, the Now Pensions’ Retire- ment Countdown fund performed 0%, year-on-year. But it should be added that prior to retirement, members will be invested in a combination of the Diversified Growth and Retirement Countdown funds with the former down -8.6% since last year.
The examples show that DC members could get different outcomes, depending on what their funds invest in. While it is difficult to generalise, it appears that diversification, and particularly not just being invested in fixed income, seems to pay off.
28 November 2022 portfolio institutional roundtable: Defined contribution
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