Alistair Byrne, Senior DC Investment Strategist, State Street Global Advisors, discusses Target Return Funds and what they are, how the fund's approach is different from lifestyle approaches, what trustees should consider when choosing a target return fund and how fund should be communicated to members.
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PRESENTER: To discuss target retirement funds I’m joined now by Alistair Byrne. He is Senior DC Investment Strategist at State Street Global Advisors. Alistair, what is a target retirement fund?
ALISTAIR BYRNE: A target retirement fund is essentially a fund designed for the members of a DC pension plan. It’s designed so that the members can use the fund really from when they join the plan. They could be in their 20s right through to retirement. And the investment mix within the fund will be managed so that it’s appropriate for their stage of life. And typically that means equities and other growth assets when they’re younger, and then becoming more conservative as the retirement date approaches.
PRESENTER: How is that different from the traditional lifestyle approach?
ALISTAIR BYRNE: It’s really around flexibility and the ease with which the strategy can adapt. So if you think about the lifestyle strategy, in common with the target retirement fund, it does get more conservative as the member gets closer to retirement. But in the lifestyle strategy that’s done by the administrator switching the member from an equity fund to a bond fund. Within the target retirement fund the change in investment mix is done within the fund by the investment manager. And that means it can be more dynamic, and it also means that if member needs change, if there’s a need to evolve and adapt the strategy, then it’s easier to do that. And if you think back to the recent pension freedoms when we abolished the need to buy an annuity, it was easier to adapt target retirement funds than it was to adapt lifestyle strategies.
PRESENTER: And what’s the adoption rate by UK defined contribution schemes?
ALISTAIR BYRNE: We’ve already seen a number of the large master trusts use target retirement funds, really, because it radically simplifies the administration that they have to do. But we’re also seeing a number of trust-based and contract-based DC schemes move from lifestyle to target retirement funds. And that’s largely because they value that future proofing, the ability to evolve the strategy through time. And many of them made the changes when they were updating their investment strategies because of the pension freedoms. They had to make a change anyway and they chose to move over to target retirement structure.
PRESENTER: And what should trustees consider if they’re considering which target retirement fund to pick?
ALISTAIR BYRNE: It’s really about making sure that the manager’s philosophy and approach matches the beliefs of the scheme. So are they comfortable with the level of investment risk that’s being taken? Is that investment risk being managed dynamically? Is the asset allocation at the retirement point consistent with how they think their members will take their benefits in terms of cash, annuity or drawdown? And after that really about the credentials of the manager, the investment credentials, and also what they have in terms of expertise about DC members. For example what research will they do in order to evolve and adapt the strategy over time?
PRESENTER: So how should schemes communicate target retirement funds to members?
ALISTAIR BYRNE: We think the overall concept is really quite simple and quite intuitive. You’re telling the member it’s a single fund. It’s designed for members retiring around a particular date, and the asset mix will be managed to be appropriate for the life stage and become more conservative as you get closer to retirement. Now obviously there’s more complexity in the portfolio, we should be transparent about that. But the member’s not likely to engage with that, and it’s about keeping it at that high level. It’s a fund designed for people retiring around about the time that you intend to retire.
PRESENTER: Alistair Byrne, thank you.
ALISTAIR BYRNE: Thank you.