Pension Glide Path: Avoid Savings Crash
The Perils of Pension Default Funds: Why You Need to Take Control
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“To make it easy and frictionless for people to join pension schemes,” says Jesal Mistry, head of DC investment governance at Legal & General Investment Management. “They are designed to cater to as broad a group of people as possible.” While auto-enrolment and default funds have undeniably boosted pension saving, a critical look reveals a potential flaw: a one-size-fits-all approach that may not suit everyone. This article explores the limitations of default funds and why taking control of your pension investments is more important than ever.
The Glide Path: A Risky Descent?
Pensions companies typically employ a “glide path,” gradually shifting investments from possibly high-growth equities to safer, but lower-yielding, bonds as investors approach retirement. This strategy aims to protect accumulated savings from market volatility. Though, the analogy of a glide path is surprisingly apt – a poorly calculated descent can end in a crash.
Research from the Pensions Policy institute (disclosure: I’m a trustee of this charity, my views are my own) illustrates this shift. Typically, a default fund investor might have two-thirds of their money in equities 20 years from retirement. By their chosen retirement date, that figure flips to two-thirds in bonds and cash. While seemingly sensible, this de-risking process isn’t universally optimal.
Why Default Funds Fall short
auto-enrolment has successfully encouraged widespread pension participation, and default funds offer a convenient option for those who lack the time, knowledge, or inclination to manage their own investments. Though, their inherent generality is a meaningful drawback.
Recent adjustments to accommodate the abolition of compulsory annuities and the rise of drawdown products haven’t fully addressed the issue. Many default funds still reduce equity exposure too aggressively as we age, potentially sacrificing long-term growth. This is especially problematic for individuals with specific circumstances.
Are You a Default Fund Misfit?
Consider these scenarios:
Substantial Backup Assets: If you have a defined benefit pension or plan to sell a business, you may be comfortable maintaining higher equity exposure for continued growth.
Health & Financial Situation: Conversely, poor health or limited financial resources might warrant a faster shift to lower-risk investments, even ahead of planned retirement. Individual Risk Tolerance: A default fund cannot accurately assess your personal appetite for risk.
These examples highlight why blindly accepting a default fund’s glide path can be detrimental. It’s crucial to remember that retirement planning isn’t a standardized process; it’s deeply personal.
Taking Control: Customizing Your Investment Strategy
Don’t succumb to inertia. Actively review the specifications of your default fund. most pension providers allow you to adjust your glide path by modifying the retirement age you specify – this doesn’t necessarily need to align with your actual retirement date. Extending the timeframe can maintain higher equity exposure for longer.
Alternatively,you can move your money out of the default fund entirely and invest in options you believe are more suitable. I personally took this route with an older workplace scheme, finding the bond allocation accelerated too quickly for my needs.
The UK Private Asset Question
The government is increasingly encouraging investment in UK private assets.However,I remain sceptical. Costs are often high,and historical performance data can be unreliable. Concerns around illiquidity and concentrated market exposure further fuel my hesitation.
Furthermore, I’m wary of political pressure to invest in specific asset classes. Unless convincingly persuaded or else, I intend to opt out of default funds and pursue a more tailored investment strategy. I’m not alone in this sentiment,and a growing number of informed investors are questioning the blanket approach to pension investment.
Jonathan Guthrie is a writer, an adviser and a former head of Lex; jonathanbuchananguthrie@gmail.com*