The TDF provider has questioned the view expressed by Scottish Life in Corporate Adviser that the Budget had killed off the single default fund. The life office had argued that default arrangements would now have to accommodate possibly three options – those still wanting an annuity, those wanting to go into drawdown and those wanting to take the full amount as cash on retirement. Scottish Life maintains that more than one option through default arrangements will be needed going forward, arguing the potential variances in outcome are too wide to ignore.
AllianceBernstein head of pensions strategies David Hutchins says its target date funds are already designed to target multiple outcomes, and argues that this is how the market has operated in the US and Australia for years. He also says there is no way to know 10 years before retirement what you are likely to want to do with your money, or even what date you will retire. He adds that semantically, a default has to have a single option, as the concept of default implies no choice is made.
Hutchins says: “The idea you would have more than one default is far-fetched. Most people are in defaults because they do not know what they want to do. A lot of people are already drawing out their funds because they are less than the £18,000 trivial commutation limit, so this is already happening.
“As a target date fund provider we are delighted by the Budget because we can move quickly to adjust our fund, unlike lifestyle providers. We took the decision to reposition the fund within 24 hours. But we are not making big changes to accommodate the Budget changes. We are targeting shorter duration gilts. But we have always had an eye to cash volatility. This just changes the emphasis.
“This debate highlights the spurious accuracy of many defaults that operate on the basis that you reach 65 in good health and buy an annuity. Scottish Life is arguing against the US market, where they have operated in this way for years.”
Scottish Life investment marketing manager Lorna Blyth says: “Things are not as straightforward as they were as a result of the Budget and we still believe people will need clear options, depending on whether they want cash, annuity or drawdown. And the Department for Work and Pensions will have to update its guidance on quality standards for DC pensions which require a derisking strategy that takes into account the members’ investment profiles.”
Muse Advisory client director Ian McQuade says: “If you are a trustee you are going to have to assume a lot of people are going to take cash, so while cash itself is not delivering much, you will want to invest in assets that protect capital value. There will be those who want to remain invested, and they will be able to stay in growth funds. And there will also be the people who do want an annuity, so that option will have to be there.”
Birthstar managing director Henry Cobbe says: “For savers who are very close to retirement and have made an active choice as to their decumulation preference these options may be appropriate, but for most people in the accumulation stage it is important to have a default that aims to maximise the potential for future retirement income without creating constraints on how it’s likely to be drawn. The future proof approach is to get a line of best fit between these different decumulation options until an active choice is made.”
