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DC schemes to change default investment strategy design

27 August 2014

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Nearly 66% of trustees are looking to change their default strategy within the next 18 months following the Budget 2014 pension reforms, according to research by SEI.

Of the 61 pension professionals that were surveyed, the investment manager said that 62% said they expect pension scheme members to use flexible drawdown, while only 25% said they believe members will purchase an annuity.

Additionally, 55% of respondents consider it feasible that members may withdraw a tax-free cash sum, while keeping the remainder invested until future needs arise, and 40% believe members will choose to receive the entire pot as a cash lump sum.

Ashish Kapur, head of solutions for SEI's institutional group in the EMEA region, said: "People are living longer and working more flexibly. A default investment strategy that targets an annuity purchase at retirement ignores the fact that the majority of defined contribution (DC) scheme members may not suddenly stop working or require access to their pension money immediately.

"Therefore, it is important to review a member's DC scheme default to make sure there is an appropriate strategy leading up to and after retirement."

The survey also found that 52% of respondents operating trust-based schemes are planning to implement new retirement solutions following the removal of compulsory annuitisation, and nearly 80% who operate a trust-based scheme intend to make changes to their default strategy within the next 18 months.

The investment manager said that 93% of respondents stated that they had met their auto-enrolment responsibilities.

Kapur said: "There will be a growing demand for alternatives to annuities, as many individuals regard pension accounts as another savings vehicle from which to withdraw monies as and when needed.

"The DC landscape is transforming inexorably and, following the successful launch of auto-enrolment, employers, trustees, and master trusts now need to evaluate how their schemes can accommodate greater flexibility. Effectively communicating these changes to scheme members will be key."

First published 27.08.2014