Gilt prices have risen sharply in recent months, on the back of volatile stock markets. One beneficiary of this has been those pension savers are still in schemes that are targeting an annuity purchase on retirement.
These older-style glidepaths, which were typically set up prior to pension freedoms being introduced, ensure asset allocation switches to lower risk gilts, bonds and cash in the years before retirement, in some cases with as much as 75 per cent in gilts.
Given the severe stock market correction in recent months, and the rising value of gilts, many of these legacy schemes have benefited, and are in positive territory.
Aegon’s investment director Nick Dixon says: “Many savers have benefited, but this is an issue we feel needs addressing.
“There is now considerable downside risk in the gilt market, so there is a challenge for the industry to look at how we manage this high gilt exposure, and whether now would be a good time to address these allocation issues to manage new emerging risks.”
As he points out the reality is that many in these legacy schemes will not be buying annuities at retirement, but are more likely to remain invested post-retirement and drawn an income from these funds.
He adds that for providers, and members, it is better to address this issue “from a position of strength” and make changes after strong recent gains.
The problem, for many contract-based pension schemes is that they cannot change asset allocation without explicit consent of members.
Dixon says that master trusts have “a lot more flexibility’ when it comes to these issues, with trustees able to make decisions on behalf of members.
Given the potential risks facing members he says he would like regulators to look at how contract-based pension schemes, and IGCs can “robustly manage” this process, and take a more flexible approach.
Pension consultants attending this Corporate Adviser round-table agreed that this was an industry-wide issue.
Aon’s head of DC investment James Monk says this has been an ongoing issue. One of the problems at present, he says, is that there are insufficient resources to transfer members to new strategies. This requires for example a substantial communication exercise, which can be challenging given the current business disruption caused by the coronavirus pandemic.
Buck head of DC and wealth Mark Pemberthy says: “The FCA has been looking to give gave IGCs similar powers to trustees then this would certainly help with this issue, particularly if part of their remit included oversight of legacy policies.” This, he said could also include section 32 policies.
Hymans Robertson head of DC consulting Mark Jaffray points out that part of the problem is there is little consistency through the market, when it comes to this issue, with some providers, such as Standard Life, moving members from annuity-targeted defaults into more universal default options.
Much will depend on the terms and conditions of individual scheme contracts. Providers may be concerned that if they move members without consent they run the risk of legal action if, for example, gilt prices continue to rise.
Monk says that as well as the regulatory hurdles, there is the challenge of ensuring IGCs have the right skill sets to oversee such fundamental changes to asset allocation. “IGCs have in the past been very focused on value for money we need to ensure they have the skill sets to provide governance and oversight of this issue.”
Monk points out that some providers will have a lot of different products and policies, and this can also be an exercise to align diverse investment strategies.
Pemberthy adds: “There is a patchwork of different providers and products, and acquisitions in this sector has exacerbated this issue. “
But he says the current situations present “an opportunity to grasp the nettle” and try to resolve this problem.