The Irish market, whilst broadly similar to the UK market in terms of pension provision in some ways, is different in that the use of target date funds is not widespread. In the Irish marketplace, most key providers focus on a one-size-fits-all default investment strategy for all members. Most providers aim to invest in growth focused assets in the early years of the member’s retirement journey, then gradually de-risk as a member nears retirement, ultimately moving all members into a static endpoint.
In-scheme drawdown does not currently exist in Ireland, so members need to actively choose the amount of tax-free (or taxable) lump sum they will take, and what residual funds will be used to purchase an annuity or an Approved Retirement Fund, which is a post-retirement product where the member remains in control of their fund in a separate policy, allowing them to draw money when they need it.
Uniquely, Irish Life, the largest pension provider in Ireland, has bucked the trend in this regard. The Irish Life Personal Lifestyle Strategy is very different to other default investment strategies as it adjusts dynamically to each members’ personal circumstances. It directs investments into appropriate funds that best match the benefits members are most likely to take when they retire at normal retirement age.
Given that Irish Life administers approximately 39 per cent of all defined contribution members in Ireland, the case for such an approach is compelling. The Irish pension laws are very clear on how members can draw benefits, and, with this is mind, Irish Life have created a default investment strategy that caters for each individual member’s likely path.
There is a strong disparity in the way that members choose to draw down their benefits. Therefore the one-size-fits-all approach operated by most providers simply cannot work effectively for all plan members.
In contrast, Irish Life uses a bespoke algorithm, refreshed every month, to assess how members will most likely draw their benefits. This ensures that they are investing members in funds that will match how they will rationally draw down their benefits at retirement age. Irish Life projects the members’ funds and determines, based upon the interaction of salary, fund and the tax rules, which option the member is most likely to take. This assessment is based upon our experience of past behaviour of members like them.
Where a member is predicted to take a tax-free lump sum, with the balance being used to purchase an annuity, Irish Life will direct the appropriate lump sum amount towards a cash fund, with the residual balance being invested in a bond fund to provide a hedge against annuity rates. Note the relative per cent in cash and bonds will vary by member depending upon their fund projection and salary interaction.
And where a member is likely to opt for an Approved Retirement Fund, Irish Life delivers a solution where the appropriate amount is invested in a cash fund, for tax-free lump sum purposes, with the balance being invested in
more growth focused assets, given that the member will be subsequently investing in a post retirement product, and will need to continue to get investment returns over time to supplement their income.
The Irish Life experience is that most members tend not to engage in investment fund choices until they are too close to retirement age, by which stage the standard asset mix they are automatically exposed to may not be appropriate. However, under the Personal Lifestyle Strategy, if members choose not to make an active fund selection, the technology driving the strategy will recognise what mix of funds is best suited to an individual member, in terms of how they are likely to draw down their retirement benefits.
And, of course, Irish Life actively engages with members to ensure that, where the assumptions are not correct, for example where a member intends to retire early, or where a member could have other pension benefits elsewhere, that appropriate measures are
taken to override the strategy to fit the exact member needs.
Irish Life also has the power to modify the lifestyling rules under PLS should the tax rules change – as they often do – or member behaviour changes. These would be agreed with the trustees of the relevant plans including the Irish Life Empower Master Trust.
