At TPT Retirement Solutions we use Alliance Bernstein (AB) to manage our Target Date Funds. Target Date Funds or TDFs are provided as the default option for Defined Contribution (DC) scheme members. They consist of a series of funds of different ‘vintages’, depending on when the member is intending to retire. The TDFs invest in a diversified portfolio of assets which become more conservative as the members of each TDF approach their target retirement date.
The ‘Freedom and Choice’ at retirement legislation came into effect in April 2015, with the result that members with DC retirement funds have more choices available to them as they approach retirement.
It’s now almost 18 months since that legislation came in and earlier this year TPT asked our older DC members about their retirement plans. This gave us with a good understanding of what members are doing with their pots when they get to the time that they can access them.
Members wanted flexibility around their future retirement date and on how they will use their pot.
We found that most members are taking their pots as cash at retirement; this is in part due to the small size of these pots, which makes other options unattractive. A few members are buying an annuity, which until these changes came in were the traditional way of securing an income in retirement from a DC scheme.
In light of this, AB has started the move to less risky assets 20 years before the target date, rather than 25 years previously. This in turn means that by the target date 60% of the fund will be available for potential cash withdrawal and 40% for income generation. This change is significant as previously, only 35% was intended for cash withdrawal. Of course, each member’s entire pot can be cashed in if they choose that option.
By accepting a modest increase in higher risk-type investments in the earlier years when individual pots are still small and possible losses can be recovered in subsequent performance, higher returns will be generated in the 25 to 15 years before target date. This enables each fund to continue to meet its return objectives to retirement date, despite having a higher proportion of lower returning investments in the later years.
The Trustee is confident that tailoring the investment strategy in this way is well aligned to the needs of members as they reach retirement. This is because it reduces the risk of a loss from market moves in the later part of the member’s journey to retirement when they are considering taking their pot as cash.
The Trustee will continue to monitor AB’s investment strategy to make sure it best serves members’ needs. These needs will evolve as contributions to DC funds grow and the schemes mature over time.