24 September 2015

New Default Investment Strategy for WorkSave Pension Plans

This year's pension reforms mean greater flexibility than ever before in how members of pension schemes can take their retirement savings.

Previously most members took their tax free cash and used the rest to buy an annuity. They now have access to their money from age 55, and can take their pot all as cash, in regular drawdown payments or as occasional lump sums.

Consequently, we've decided our current default investment strategy - which was designed primarily for those wishing to buy an annuity - may not now be the best solution and are launching a new default investment strategy.

Current default investment strategy

Our current default investment strategy is the Legal & General PDF file: View - Multi-Asset/Over 15 Year Gilts 10 Year Lifestyle Profile (LNB3) PDF size: 568KB  (Multi-Asset Lifestyle Profile). This invests in a diversified range of assets and aims to provide a suitable combination of the potential for growth with relative security for members' savings. It's specifically designed for those planning to purchase an annuity to provide a guaranteed income for life.

When members reach ten years from the selected retirement age, the lifestyle profile gradually adjusts the underlying assets to reduce the potential for a sudden drop in value due to stock market volatility.

A new approach for a new generation

Members now have more options for taking their pension savings either in regular instalments, occasional lump sums or some combination thereof. Some may prefer a more open-ended default investment approach and this is the intention for our new default investment strategy for our WorkSave Pension Plan (WPP) schemes.

From 1 October for all new schemes we are removing the de-risking function to give members' pension pots greater potential for growth over the full duration of their plan including beyond the selected retirement age. In other words, their contributions will be invested directly in our Multi-Asset Fund () without the lifestyle profile element.

Similarly, all new joiners to existing WPP schemes will be invested directly in our Multi-Asset Fund without the lifestyle profile element. We will write to employers to let them know when this is going to happen for their schemes.

We will also be writing directly to existing members of these schemes to encourage them to think about their own personal circumstances and their plans for taking their money. We'll be writing to these existing members in segments so we can tailor our messaging depending on how close they are to their selected retirement age. Further details will follow in due course.

If they do nothing

Members who do nothing will remain in the Multi-Asset Lifestyle Profile which, as noted previously, aims to combine the potential for long-term growth with relatively low volatility and incorporates a ten-year de-risking function.

Three new investment strategies for pensions freedom

Recognising the three main options for members, that is cash, drawdown or annuity, we're highlighting three alternative investment strategies to help them achieve their desired outcomes. Market research suggests many members may not make decisions until they are close to taking their money, so these options de-risk over a three year period. The new routes are as follows:

  • Take the entire pot as cash in one go or over a relatively short period.
    Pedestrian signpost

    Option to switch savings into the PDF file: View - Cash Lifestyle Profile (LQ43) PDF size: 93KB   where their money is gradually moved into the Cash Fund so there is less chance of a sudden fall in value in the event of a stock market crash.
  • Leave the pot invested to provide a drawdown income over the medium to long term - either as monthly payments or occasional lump sums or a combination of the two.
    Option to switch savings into our PDF file: View - Drawdown Lifestyle Profile (LQ23) PDF size: 41KB . This lifestyle gradually moves their money into the Retirement Income Multi Asset Fund which has been created specifically for this situation to provide a stable return over the long term combined with relatively low volatility.
  • Use the pension pot to provide a guaranteed income for life or over a fixed period via an annuity.
    Option to switch savings to our PDF file: View - Annuity Lifestyle Profile (LQ33) PDF size: 101KB . This lifestyle gradually moves 75% of their money into the Pre-Retirement Fund which invests in assets that reflect the broad characteristics of the investments underlying the pricing of a typical fixed rate annuity product. The remainder (25%) of their money moves to the Cash Fund.

As they approach their selected retirement age, we will prompt members to consider if one of these options suits their requirements.

In summary

The introduction of pension freedoms has fundamentally changed the way members take their retirement savings.

Our current investment strategy was designed for people choosing to buy an annuity and is no longer suitable given the range of options available.

We are therefore taking a number of actions to help our members make the most of their pension savings:

  • Removing the de-risking facility from our current default investment for all new schemes with effect from 1 October.
  • Removing the de-risking facility from our default investment for all new joiners.
  • Encouraging existing scheme members to review their own strategy in line with how they plan to use their money.
  • Introducing three new investment routes depending on whether they prefer cash, income drawdown or annuity to be activated three years before taking their benefits.

Our white paper explains our rationale behind our change of default investment strategy in more detail.

For more information contact your usual Legal & General representative.

An important note

Please note that the default investment options for our Stakeholder Pension Plans and Group Personal Pension Plan 2000 will remain unaltered.