New default investment strategy for WorkSave Pension Plans
This year's pension reforms mean greater flexibility than ever before in how members of your pension scheme 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
As a reminder, the default investment strategy is the way we invest your employees' money unless they tell us otherwise.
Our current default investment strategy is the Legal & General PDF file: Multi-Asset/Over 15 Year Gilts 10 Year Lifestyle Profile PDF size: 289KB (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. This process is known as 'de-risking'.
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 automatic de-risking in our default investment 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 Legal & General (PMC) Multi-Asset Fund 3 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. For instance, if they don't intend to buy an annuity with their pension pot, they may wish to switch from the automatic de-risking profile and leave their money invested for growth throughout their later years.
If they do nothing
Existing 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.
When they are ten years from their selected retirement age, we will begin to move their money into lower risk investments to reduce the chances of a sudden fall in value in the event of a stock market crash.
However, in exchange for this security the potential for growth is reduced, which could be important if they plan to leave their pot invested for the long term.
Three new investment strategies for pensions freedom
Recognising the three main options for members, that is cash,drawdown or annuity, we're introducing 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 from the Multi-Asset Fund over a three year period. The alternative investments are as follows:
- Take the entire pot as cash in one go or over a relatively short period
Option to switch their savings into the PDF file: Cash Lifestyle Profile PDF size: 41KB where their pension pot is gradually moved into a 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 their savings into our PDF file: Drawdown Lifestyle Profile PDF size: 41KB . This lifestyle gradually moves their pension pot 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 their savings to our PDF file: Annuity Lifestyle Profile PDF size: 42KB . This lifestyle gradually moves 75% of their pension pot 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 of their pension pot switches 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.
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 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 investment routes depending on whether they prefer cash, income drawdown or annuity to be activated three years before taking their benefits.
For more information contact your usual Legal & General representative.
An important note on our Stakeholder Pension Scheme
Please note that the Stakeholder Pension Plan and the Group Personal Pension Plan 2000 will remain unaltered.