A new breed of DC

The defined contribution (DC) space has been flooded with new and modified post-Budget strategies, finds Chris Panteli.

The 2014 Budget introduced greater choice at retirement for members of defined contribution (DC) schemes. After receiving up to 25% of their pension pot tax-free, members will no longer be required to buy an annuity, but instead may also choose to withdraw cash lump sums from their DC funds either over a short period or by drawing down their pension pot over time.

Unsurprisingly, the effect on annuity providers has been devastating, with research by CoreData suggesting the number of 51-59 year olds expected to buy an annuity falling to 2.1 million from 5.4 million pre-Budget.

While the announcement initially sparked fears that many people would take the money and run, it is far more likely that DC scheme members will instead look for a longer-term home for their savings, which will continue to provide low-risk income and growth.

Naturally, the asset management industry has rushed to fill the post-retirement gap left by annuitisation, through the launch of new products or the repurposing of existing strategies.

“New products are being thrown around out there like confetti,” says JP Morgan Asset Management head of UK DC Simon Chinnery.

“Anyone who hasn’t got a multi-asset product is now rushing to get one to market and those who do are rebadging it with an income capability.”

JPMAM has no immediate plans to launch a new strategy to cater for the post-Budget changes, instead preferring to rely on its SmartRetirement range of funds. The multi-asset, target date strategies launched in the UK last year, but have a long track-record in the US.

Indeed, target date funds are likely to become the favoured option over traditional lifestyle strategies thanks to their dynamic asset allocation and greater flexibility.

Alistair Byrne, DC strategist at State Street Global Advisors (SSgA) says this trend is already apparent:

“The market for target date funds is growing, there are now four or five providers, with more on the way. Increasingly, these will be focusing on a ‘through retirement’ approach – allowing the member to remain invested and draw an income from their fund over time.”

This ability to allow members to remain invested through retirement is the crucial step for the new breed of DC pension funds. Some consultants are now promoting “three-headed” lifecycle strategies, where the member has a choice of paths targeting income drawdown, a cash lump sum at retirement, and annuitisation.

Consultant Mercer’s new Smartpath strategy is one such product. It invests members into a diversified growth asset mix before automatically ‘gliding’ into a more defensive approach. It then offers the member one of three options: full cash withdrawal at retirement, traditional annuitisation or ongoing income drawdown.  This final option aims to balance the need for ongoing growth with managing volatility.