Industry Forum TARGET DATE FUNDS
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
CASupp.Oct.12_p001_cover_ed:CA_alt covers 25/9/12 18:45 Page 1
SPECIAL SUPPLEMENT OCTOBER 2012
Industry Forum
TARGET DATE FUNDS
02
SPONSOR’S COMMENT
03
COMMENT
04-08
TARGET FOR TODAY
AND TOMORROW
DO TARGET DATE FUNDS
REALLY OFFER
EMPLOYEES MORE
SUITABLE ASSET
ALLOCATION?
09-11
LITIGATION MITIGATION
THE LEGAL PERILS OF
RECOMMENDING
DEFAULT FUNDS
In association with
2 SPONSOR’S COMMENT October 2012
The default option:
new funds for new rules
As auto-enrolment commences in the UK, much of the focus to date as been on getting the right
systems and processes in place by the appropriate staging date. And rightly so. Equal consideration
should be given to the selection of an appropriate default fund. Many of the default funds in place for
old pension contracts are no longer in line with regulatory guidance. With the vast majority of past and
future savers taking the default option, employers, providers and advisers should mitigate their liability
by ensuring that the default fund they review or select on behalf of an individual or target group is fit
for purpose, and that the selection process is well documented.
Know the rules
The DWP has published detailed guidance1 on what constitutes an eligible default fund. Importantly
this guidance applies to all pension arrangements – whether related to auto-enrolment or not. This
means that any adviser conducting a review of a pension arrangement since the guidance was
published in May 2011, should already be following that guidance as best practice. Policymakers and
Henry Cobbe, CFA regulators are likewise showing a keen interest as to whether this guidance is observed, to reduce
Executive Director the risk of any inappropriateness scandal that would de-rail auto-enrolment: a project that has been
some ten years in the making.
BirthStar is a trading
name of Elston Target Date Funds: default best practice
Consulting Limited Like NEST, we believe that Target Date Funds (multi-asset funds whose risk profile becomes more
conservative over time), represents best practice when it comes to delivering a default fund option.
Target Date Funds offer a more sophisticated version of automated lifestyling, as the risk-return asset-
allocation is managed on a daily basis, within set strategic and tactical asset allocation parameters
that de-risks on approach or “glidepath” to the target date, typically retirement. From an investment
perspective, this means that Target Date Funds can offer more consistent investment outcomes
relative to traditional lifestyling, at a comparable price. From a legal perspective, this transfers much
of the fiduciary responsibility to the Target Date Fund manager, providing some “safe-harbour” to
those who recommended them.
NEST or the Rest?
So if TDFs are best practice, why not just used NEST? It depends on the target group. TDFs are
designed for very specific target groups, mainly determined by earnings characteristics as a proxy for
risk capacity. For example, NEST’s designated target group of “new savers” has an average income
of £19,8002. So while NEST may indeed be appropriate for target individuals/groups whose average
income is close to that, it may actually be inappropriate for those whose average income is very
different. Understanding whether target date fund design is appropriate to the characteristics of a
target groups is the responsibility of those involved in the selection process.
Introducing BIRTHSTAR
We are developing BIRTHSTAR Target Date Funds to suit the likely needs of those who have a higher
earnings profile than what has been assumed by NEST. We are partnering with a leading insurer
to launch our fund range in October, while the funds will be managed by a leading target-date fund
manager with experience and a proven track-record both in the US and the UK. The combination
of auto-enrolment and RDR means now is a good time to take a fresh look at your default fund
recommendations. We hope we can help you deliver compliant solutions that your clients require.
BIRTHSTAR® is a trading name of Elston Consulting Limited. Elston Consulting Limited is an Appointed Representative of Mirabella
Financial Services LLP, which is authorised and regulated by the Financial Services Authority. Elston Consulting Limited is registered
in England & Wales, registration number 07125478, registered office 20-22 Bedford Row, London WC1R 4JS.
1
www.dwp.gov.uk/docs/def-opt-guid.pdf
2
DWP data 2009
CAS_1012 2 24/09/2012 17:25
CASupp.Oct.12_p003_contents_ed:CA Contents template 25/9/12 18:48 Page 3
October 2012 TARGET DATE FUNDS 03
editor’s comment
contents I DOUBT anyone would say default funds on the market are perfect. So any
new entrants into the market are always going to be met with interest by
04 Target for today and advisers. Whether target date funds are going to take the growing UK
tomorrow pension sector by storm remains to be seen, but they do have features that
Target date funds claim to dovetail well with the requirements of auto-enrolment, particularly in an
offer employees better, more environment where many middle earners are likely to be starved of
flexible and more suitable professional advice as a result of the Retail Distribution Review.
asset allocation strategies at Target date funds have been around since the 1990s in the US, where they
all stages of their working life.
burgeoned under the safe harbour halo they were granted by regulators. That
Cherry Reynard finds advisers
all went fine until some funds suffered from extreme volatility in the financial
welcoming more choice in the
crisis of 2008 because they were considerably more exposed to volatile
default space.
assets than similarly labelled funds with other providers.
09 Litigation mitigation Supporters of target date funds say lessons have been learned from the
Auto-enrolment is a regulatory US experience. They will also point to the fact that Nest is a target date
game-changer when it comes fund,and if the strategy is good enough for Nest, then nobody should be
to default fund selection – criticised for recommending something similar for private sector schemes.
minimising risk is essential Critics point out that target date funds that differentiate themselves from
for advisers. Nest by being more aggressive, will still be unsuitable if they do not target
annuitisation, as this is still likely to be the retirement strategy of the majority
of workers, regardless of the scheme profile.
But with time there is an argument to say increasing numbers will be
looking to go into drawdown, just as the RDR makes the advice they would
In association with normally have sought becomes unaffordable to many of them. Does this
create scope for two defaults – one for those likely to annuitise and one for
those likely to be drawdown candidates? Two defaults would of course be a
paradox because choice will have been introduced. But default funds will in
the coming years need to figure out how to address these two increasingly
polarised non-advised communities of scheme member. Whether target date
funds play a role in addressing that remains to be seen.
John Greenwood, Editor
Editor John Greenwood 020 7970 4688 john.greenwood@centaur.co.uk Production
Director (editorial) Richard Brighouse Production Director (advertising) Nita Patel Art
Director Caitlin Smail Commercial Director Chris Watters 020 7943 8028, chris.watters@centaur.co.uk
Publisher David Cowan 020 7943 8029 david.cowan@centaur.co.uk Managing Director Tim Potter
Corporate Adviser is published 12 times a year by Centaur Holdings Plc. Company Registration No. 1391142 St Giles
House, 50 Poland Street London W1F 7AX, UK T: +44 (0)20 7943 8000 E: corporate.adviser@centaur.co.uk Printed by
Pensord Press. Corporate Adviser accepts no responsibility for loss or damage to material submitted for publication.
COVER ART copyright Centaur Holdings plc. All rights reserved. No part may be reproduced in any form without written permission
of the publisher. For information about the range of products produced by centaur, visit www.centaur.co.uk. To subscribe
Melvin Evans to Corporate Adviser contact 0207 292 3718
CASupp.Oct.12_p004-008_feature1_ed:CA Contents template 25/9/12 18:24 Page 04
04 TARGET DATE FUNDS October 2012
Target date funds claim to offer
employees better, more flexible and more
suitable asset allocation strategies at all
stages of their life. Cherry Reynard finds
advisers welcoming more choice in the
default space
Target for today
and tomorrow
T
In association with he onset of auto-enrolment is focusing
increasing demands on default funds, with
charges, governance, investment strategy
and de-risking all factors that advisers must
take into account when selecting a fund for a
particular workforce. Yet it is likely that thousands
of schemes in place today retain default funds that ing strategies that leave no scope for improving invest-
are not appropriate for the needs of their member- ment returns.
ship, with unsuitable asset allocation and derisking Default funds have been progressively refined over
a particular problem for many older schemes. Target time. Although choice in the market remains rela-
date funds claim to offer more suitable asset tively limited, target date funds are being touted as
allocation strategies than traditional lifestyling funds, the latest solution to the problem.
yet can they really improve on what is already Each incarnation of the default fund has, to some
being offered? extent, dealt with the problem of the last. The first
Delegates at the Corporate Adviser round table Tar- solution was a basic tracker fund, which was inade-
get date funds – the answer to the new default quately diversified. Balanced funds seemed a better
fund challenge? agreed that over-exposure to risk assets solution, but the fixed asset allocation still saw some
as employees near retirement, or under-exposure in plan members with an inappropriate asset allocation
the early years of a scheme have become significant for their age and length of time to retirement. In
problems in some cases. They also accepted that tra- response to this, funds started to introduce an element
ditional lifestyle funds operate deterministic de-risk- of lifestyling, but these still had the problem of deter-
CASupp.Oct.12_p004-008_feature1_ed:CA Contents template 25/9/12 18:25 Page 05
October 2012 TARGET DATE FUNDS 05
Lisa James, technical manager at the Oval Group,
“It has been says: “One of the biggest risks is that a lot of strate-
difficult to gies currently on the market start off being 100 per
benchmark any cent in equity, which would never be the case on the
wealth management side. I suspect the solution will
of these be looking at the asset allocation of a strategy first
[investment] ideas and then populating that with passive strategies.”
She adds that more recent entrants into the mar-
against the last ket have been much better, with more nuanced asset
few years allocation strategies, rather than strategies that move
because they wholesale from equities to bonds at a certain point
regardless of the market environment.
have been The most recent solution to the default fund chal-
different times. lenge, target date funds, aim to address in particular
some key problems with ‘lifestyling’. Henry Cobbe,
We are trying to executive director of BirthStar, a new target date fund
pit new ideas provider, cited academic research that has started to
suggest problems with automatic switching. He
against a new pointed to research for the Queensland University of
background” Technology, University of Edinburgh & Griffith Uni-
versity by Byrne & Drew that concludes: “Determin-
istic switching rules produce inferior wealth outcomes
for the investor compared to strategies that dynami-
cally alter the allocation between growth and conser-
vative assets based on cumulative portfolio
performance relative to a set target date”.
He also cited more recent research from the EDHEC-
Risk Institute where finance academics Martellini &
Milhau said: “The opportunity cost involved in purely
ministic asset allocation shifts that took little account deterministic life-cycle strategies is found to be sub-
of the prevailing investment climate. stantial”.
Steve Herbert, head of benefits strategy at Jelf Cobbe argued that target date funds are the only
Employee Benefits, highlights the problems for advis- default solution that addresses the four risks to an
ers: “It has been difficult to benchmark any of these optimal outcome for pension scheme members –
ideas against the last few years because they have been market, shortfall, inflation and longevity. He
different times. We are trying to pit new ideas against said: “They aim to generate a line of best
a new background.” fit between all the investment outcomes
Advisers have a range of requirements, which have and the right allocation through a per-
not yet been fully addressed by the target date funds: son’s life. The funds remain appropri-
John Yates, head of client management at Helm God- ate for a typical investor even if they
frey says: “At each stage we have two concerns – are accidentally ‘unreviewed’.”
returns and inflation. Our concerns are around the He added: “If you look at a balanced
kind of risk a manager prepared to take to achieve the fund, you are under-allocated until your
return. We look at asset allocation by risk budget.” mid-40s and then over-allocated at retire-
L
CASupp.Oct.12_p004-008_feature1_ed:CA Contents template 25/9/12 18:25 Page 06
06 TARGET DATE FUNDS October 2012
Hugh Gittins
Henry Cobbe Eversheds
BirthStar
David Cooper
Creative Benefits
“One of the ment given that we are all living longer and this is the
start of a 30-year investment journey. Traditionally
ties at retirement. “I’d argue that you’re designing a
product that needs to be fit for purpose for the next 30
biggest risks is this was because the market has annuitised. Looking to 40 years, given the uncertainty inherent in capital
that a lot of forward it makes sense for everyone to have a bit more markets. Therefore designing in flexibility is prefer-
flexibility.” able to making a decision to include or
strategies Cobbe argued that target date funds exclude one asset class based on his-
currently on the remain best practice default funds toric or current thinking,“he said.
market start off under auto-enrolment, with the fact
that Nest is a target date fund a gov-
This is also the rationale behind
including ‘diversifier assets’, which
being 100 per ernment endorsement of the strat- – to some extent – help to future-
cent in equity, egy. proof the design. Equities have pro-
Target date funds are different to duced weak returns for a decade,
which would lifestyling in three main ways. The while government bonds now look
never be the case target date manager has full fiduci- extremely expensive. Supporters of
ary discretion for the investors in that target date funds point out asset allo-
on the wealth fund. Secondly, the de-risking is imple- cation and risk are often managed on a
management mented gradually over the entire lifecycle of daily basis rather than quarterly or annually
side. I suspect the the fund rather than suddenly over a short time
period. Finally, the risk management and asset allo-
as some lifestyle products have done.
But given many advisers are unconvinced of fund
solution will be cation decisions are reviewed every day and managed managers’ ability to call markets within specific funds,
looking at the daily to take account of market conditions. Lifestyling are they really going to be able to make calls on switch-
is typically a calendar event, where de-risking is done ing asset allocation ratios and get it right more times
asset allocation mechanistically. than they get it wrong?
of a strategy first This is important in volatility management, which Herbert said: “This belief that these clever man-
and then has been an important factor for advisers historically.
David Cooper, client manager at Creative Benefits,
agers can time the market is ill-founded and has been
so ever since the markets became automated.”
populating that said: “The question of volatility has been very impor- Paul Todd, investment director of Nest, said: “Can
with passive tant for me. It is the information I want to see first. I I just turn this round because we have had this debate
want to know how a manager can step outside exist- lots of times. Not making an active decision is an active
strategies” ing parameters to get a better outcome for investors.” decision in itself. So you have actively decided that
Cobbe said the BirthStar fund would have a range you will try to predict where markets are going to be
of, say, 0-20 per cent equities compared to some in 40 years time, or you have actively decided that I
lifestyling funds that guarantee zero per cent in equi- don't care because I don't think it can be done. Not
CASupp.Oct.12_p004-008_feature1_ed:CA Contents template 25/9/12 18:25 Page 07
October 2012 TARGET DATE FUNDS 07
Paul Todd
Steve Herbert Nest Corporation John Yates
Jelf Employee Benefits Helm Godfrey
Lisa James
Oval Group
thinking that you can have some influence isn't a pas-
sive decision that lets you off the hook. But we would
date often had wildly different asset allocations, as
asset allocation parameters were not regulated. There
“There needs to
never describe ourselves as tactical. The most pow- was consumer outcry owing to the dispersion of be some balance.
erful tool we have is diversification.” returns during the global financial crisis, particularly It’s about the
Regulators have – unusually – spoken as one in sup- those with high equity exposure approaching retire-
porting target date funds. Nest’s target-date fund has ment prompting calls for a UK voluntary code, simi- range of risk that
been seen as a benchmark. Cobbe argues that Nest is lar to the SEC guidelines to ensure that mistakes aren’t you are prepared
always more suitable for those earning up to £19,000,
while between £19,000 and £24,000, Nest or a target date
repeated.
So while those marketing target date funds are more
to take no matter
fund such as his own is suitable. For firms with median than willing to espouse their benefits, do they address what assets you
incomes above this level, target date funds such as his the key concerns of investors and the advisers that are holding.
own are more suitable than Nest, he argued, stress- represent them? Herbert said: “My concern is that
ing the need to think of the median income of the while a fund will be being managed to a target date, These funds are
workforce. the actual risks aren’t necessarily in line with that step forward.
There appear to be very different glide paths goal and are more in line with them achieving a bet-
between Nest and the rest of the funds on the market. ter return. They stay more exposed to equities when
You’re never
There is a reason for this: Nest is targeting new savers they shouldn’t be and everything goes south. How does going to get it
who have less money, said Cobbe.
Target date funds have encountered some problems
target date get around that?”
Cobbe concurred that this desire for outperfor-
completely right
in the US, where they are widespread. Delegates mance was the main reason the US for everyone in
hear that the main problem in the US was problems happened. He said: “Peo- the scheme”
that the allocation to equities was ple went too much for growth
unsuitable given the age profile of from the commercial impera-
members. Cobbe said: “This was tive to gather assets”. However
the old school approach of need- he believes that increasingly
ing to gather assets, rather than the market will move to per-
being performance measurement formance measurement on an
on an outcome basis.” outcome basis rather than
Delegates agreed that the mar- static basis. The viability of
ket needs to learn from the expe- funds will be measured on a
rience of the US, where a number stochastic basis rather than a
of poor providers were inadequately straight line basis. He concluded:
transparent. Funds for the same target “Funds that outperform their target
L
CASupp.Oct.12_p004-008_feature1_ed:CA Contents template 25/9/12 18:25 Page 08
08 TARGET DATE FUNDS October 2012
date indices will be those who have been sensible exposure at retirement intended for those going into
throughout the cycle.” income drawdown rather than buying an annuity.
James said that educating some advisers will be a The final question was whether there should be
hurdle. She said: “The worst thing for advisers is peer any target date at all. Cooper pointed out that target
comparison. They like a top quartile fund, without ask- dating may, in time, become obsolete as retirement
ing whether it is top quartile because it’s taken more becomes more fluid and is
risk. But is it controlling risk? Is it delivering return increasingly phased, or deferred.
over a long period?” At this point, a lifelong fund,
Yates said it is important to analyse the extent managed until death,
“The worst thing to which target date managers will step outside ranges may be a more logical
if they think it is going to deliver a better outcome. He solution. In the
for advisers is added: “There needs to be some balance. For me it’s meantime, target
peer comparison. about the range of risk that you are prepared to take date funds are cer-
They like a top no matter what assets you are holding. These funds tainly adding a new
are a step forward. You’re never going to get it com- dimension to advisers’
quartile fund, pletely right for everyone in the scheme.” solutions to the
without asking Delegates thought it could be some years before the default fund
majority of funds were of a size to merit levels of equity conundrum. I
whether it is top
quartile because STRAW POLL DEFAULTS OF THE FUTURE
it’s taken more
risk. But is it I What proportion of default funds in schemes Nil 0%
controlling risk? managed by your firm are currently compliant 0-15bps 25%
with DWP auto-enrolment guidelines? 16-30bps 25%
Is it delivering 0-25% 50% More than 30bps 50%
return over a long 26-50% 25%
51-99% 25% I Looking forward 24 months from now, how
period?” 100% 0% prevalent will target date funds be in the contract-
based pensions landscape?
I Should auto-enrolment schemes offer a They will be the norm for newly set up schemes
'drawdown default' accumulation option for those 25%
employees unlikely to want to buy an annuity at Some new schemes will have them
retirement? but they will be a minority 75%
Yes 50% They will be the norm for all schemes 0%
No 50% They will be rare 0%
I Should TPR set out a kitemarking system that I How does Nest's current asset allocation
offers safe harbour for default funds that meet its strategy match its target group of low to moderate
criteria? income "new savers"?
Yes 50% Appropriate 75%
No 50% Too conservative 25%
Too aggressive 0%
I Does the extra cost of dynamically managed
target date funds make them unacceptably I Which of these de-risking strategies is most
expensive as an auto-enrolment default suitable for moderate-higher income "existing
Yes 25% savers"
No 75% Nest's target date funds 0%
Nest-style target date funds, but with a less
I How many basis points above the cost of a conservative asset allocation 100%
traditional lifestyling fund is a fair price for a Balanced funds with traditional lifestyling 0%
dynamically managed target date fund?
CASupp.Oct.12_p009-011_feature2_ed:CA Contents template 25/9/12 18:26 Page 9
October 2012 TARGET DATE FUNDS 09
Auto-enrolment is
a regulatory
game-changer
when it comes to
default fund
selection – so
minimising risk is
essential for advisers.
Cherry Reynard reports
Litigation mitigation
T
In association with he selection of the default fund for defined follow guidelines set out by Department of Work and
contribution schemes looks set to become Pensions.
a regulatory hot potato for advisers. Amid Gittins said: “The whole concept of auto-enrol-
an increased focus across the board on the ment is predicated on the assumption of inertia and
governance of defined contribution pension schemes the idea that lots of members will end up in the default
from policymakers, the default fund has attracted scheme. This has been brought to a head by auto-
special attention. For advisers assessing suitability enrolment.”
for an often disparate workforce, and for the employ- Gittins argues that auto-enrolment has moved the
ers they are advising, that means the risk of regula- goalposts when it comes to the potential liability that
tory or even legal action if defaults fail to deliver has employers bear in relation to selecting of the default
increased considerably. fund, and in turn, should they find themselves claimed
Such was the opinion that Hugh Gittins, pensions against, they will look to recoup any loss from the
partner at Eversheds, expressed to delegates at the corporate IFA or employee benefit consultant that
Corporate Adviser round table Target date funds – the recommended it to them. Gittins says: “Employers
answer to the new default fund challenge? held in Lon- are under a duty of care and confidence to their
don last month. employees. There is no case law in this area, but it
Auto-enrolment has focused the minds of regula- would be reasonable to assume that would include
tors. It is now not only obligatory for every scheme the obligation to provide an appropriate default fund
to have a default option, but that fund should also for employees. The employer will engage advisers to
L
CASupp.Oct.12_p009-011_feature2_ed:CA Contents template 25/9/12 18:26 Page 10
10 TARGET DATE FUNDS October 2012
“I don’t think help select that fund. Where the fund is inappropri- how to design and monitor a default fund.
ate for any reason, the employer, to the extent that it The Pensions Regulator in its guidance for pen-
kite-marking is liable for any losses, will in turn seek to claim for sions governance also points to the DWP guidance.
takes away any any loss.” Gittins adds: “None of this is coded in law, but with
Gittins pointed out that just because nobody had these very strong statements it is clearly going to be
responsibility to every been sued over a default fund before does not the safest approach to ensure that advisers are act-
ensure mean it could happen in the future. With auto-enrol- ing within this guidance. It they choose to depart
appropriateness ment taking UK pensions into genuinely new terri-
tory that nudges employees into schemes that put
from that guidance and it goes wrong, they will be on
the back foot.” The final requirement is to monitor
for your average their cash into the stock market, the potential for ongoing suitability, at least every three years.
scheme member. future claims is genuine. The FSA Conduct of Business rules says that
Gittins suggested that to mitigate this liability adviser firms should consider ‘relevant financial
I think there can advisers first need to be clear about where their products’ that meet the needs of clients. It says Nest
be a view that it’s responsibility starts and ends. This should be laid out is a ‘relevant financial product’ to consider in this
kite-marked so in the terms of engagement. For most advisers, their
responsibility will include selecting an appropriate
context. As such, Gittins believes it is reasonable to
compare how the funds being offered in a scheme
investors don’t default fund, monitoring the suitability and appro- compare to Nest. The FSA has also made it clear that
have to do priateness of that fund over time, and communicat- it considers Nest to be a relevant design benchmark
ing to the employers and members about changes in for the default fund. He added: “Advisers need to look
anything, but you the fund. Equally, Gittins said that advisers need to at how the fund compares with the funds being offered
still have a ensure that their role and responsibilities in con- by Nest. It is clear that Nest will be the benchmark
nection with the selection, design, review and moni- against which other default funds are assessed.”
responsibility to toring of any default fund are clearly documented. However, when it comes to suitability of default
review” Advisers also need to ensure that any fund is appro- fund investment strategy, whether in relation to de-
priate and complies with current guidance. Although risking or other features, Nest is not the be all and
there is no case law surrounding the default fund for end all said Gittins. Nest is targeted at plan members
defined contribution schemes, the regulators have in a certain salary bracket and its design may not be
been clear about the type of structure they believe suitable for employees at a higher salary bracket. Git-
to be most appropriate. Gittins highlights the fact tins adds: “It is not sufficient to say that Nest is the
that the DWP guidance on eligible default funds makes gold standard, because it is not necessarily designed
clear what is expected and points to the fact that the with the same membership in mind.”
FSA explicitly directs advisers to that guidance on Advisers need to bear in mind the membershipCASupp.Oct.12_p009-011_feature2_ed:CA Contents template 25/9/12 18:26 Page 11
October 2012 TARGET DATE FUNDS 11
profile and recognise how that membership profile “Advisers have to say what the asset allocation is
changes over time to assess ongoing suitability, par- today and how it will evolve over time. They can’t
ticularly as plan participants start to near retirement. reach a point where they say, ‘we don’t have to review
A fund needs to be appropriately and competitively this’.”
priced, but not to the exclusion of other considera- John Yates, head of client management at Helm
tions. Gittins was clear that if an adviser selects an Godfrey said: “Communication to the employer is
inappropriate default fund simply because it is cheap, key. If they don’t understand the downside or upside
there will be risks. Paul Todd, head of investment risks, there can be a real problem.” It is clear that a
policy at Nest, said: “I’d like to see the initial charge simply request to look the website or sending employ-
go as soon as possible to create a level playing field. ers away with a heap of documents is inadequate. “The whole
If I am paying over 0.5 per cent, I expect the extra But advisers face a challenge in bringing pensions
value to be clear.” to life for employers, let alone investment strategies. concept of auto-
Kite-marking and safe harbour laws could help Herbert said: “Most employers are not that interested. enrolment is
advisers, it was suggested. Steve Herbert, head of
benefits strategy at Jelf Employee Benefits, believes
Finding something that is particularly pertinent to
their workforce is quite fundamental.”
predicted on the
it is likely to happen anyway, given the current thrust Another regulatory question facing advisers assumption of
of regulation. However, it may not help advisers as relates to their legacy books of business, which could inertia and that
much as they expect. Lisa James, technical manager contain potential legal and regulated risks if schemes
at the Oval Group, said: “There isn’t really a huge have not been reviewed with the rising auto-enrol- lots of members
amount of choice at the moment. I don’t think kite- ment standards in mind. Gittins said: “There is a will end up in the
marking takes away any responsibility to ensure legal risk in advisers’ back-books if they are not
appropriateness for your average scheme member. I reviewing the default options in line with the guid-
default scheme”
think there can be a view that it’s kite-marked so ance.” This is clearly a problem when people have
investors don’t have to do anything, but you still have long since left their employer and contact details are
a responsibility to review.” out of date.
In the United States, ‘safe harbour’ legislation Gittins suggested that the best defence for advis-
decrees that employers cannot be sued if they follow ers is to have a clearly defined process: “If an adviser
the steps put in place to create a qualified investment has put policy statements together, incorporating
default alternative. However, Todd disputes follow- areas such as the income replacement ratio and the
ing this route has actually resulted in better product risks people need to take, it puts them in a much
design. stronger position. There are always people who are
There is also a communication obligation on advis- at the extremes in any scheme.” James agreed that
ers, with lessons to be learned from the US experi- an audit trail puts advisers in a much stronger posi-
ence. Where there has been legal action it has tended tion, particularly years after the event.
to be the communication that has been found want- Cobbe meanwhile argued that advisers could
ing rather than necessarily inappropriate asset allo- reduce their regulatory risk by switching away from
cation in the default fund. In the US, the obligation default funds with rigid investment processes, par-
to report ongoing asset allocation and suitability are ticularly in relation to derisking, to more flexible
now hard-coded into law. In the UK, communication defaults that can dynamically switch to ensure they
obligations are still self-regulated, but legislation continue to meet a workforce’s needs. Schemes seen
could be forthcoming if there is widespread bad prac- as set and forget five or 10 years ago no longer do the
tice. job, he argued.
Gittins said that advisers need to communicate But it is not all doom and gloom for advisers. The
the options up front and then the conclusions from immature default fund market is set to get more
reviews, which should be done at least every three product choice in the coming years, with more
years, while David Cooper, client manager at Creative asset allocation flexibility expected to become
Benefits, said: “Outcomes are often lost. If a fund more mainstream. Regulators have been clear
doesn’t deliver what is expected, if people in the about the type of structure advisers need to fol-
default fund are left disillusioned, this is a problem.” low and how they need to communicate that to their
He believes that managing those expectations are a clients. Advisers will be hoping they can avoid the
vital part of ongoing communication. Meanwhile need for more draconian regulation by following
Henry Cobbe, executive director of Birthstar, argued: best practice. ICAS_1012 12 24/09/2012 17:29
You can also read
