Review of Investment Strategies

Our client is a long established nationwide organisation. The plan had been in place for many years and the assets had grown to €100m. The trustees had reviewed their investments regularly but were somewhat uncomfortable with the default investment strategy in place for the plan

The Issues

The Trustees had adopted a Lifestyle Default strategy, which automatically transitioned member assets over time from growth assets (equities) to a cash and bond funds at retirement in the proportions of 25% and 75% respectively.  The logic as they explained it was simple, most members take a tax free lump sum at retirement and therefore some of their fund should be in cash (to guard against sudden falls in markets). The balance of 75% was placed in bond funds, which provides some “price” protection for those buying annuities.

The Problem

Although the trustees knew there was an issue they could not quite figure out the precise nature of the issue until a long-serving member came to retirement. This lady had been in employment for a very long time, but had only joined the pension plan in later years.  Her circumstances were to expose the problem they faced.

Her retirement fund amounted to approximately €100,000, from which she could take a tax-free lump sum of €60,000, based on her length of service in employment (not the pension plan) and her level of pay. In such circumstances, the balance of 40% was compelled to buy an annuity.  In essence, she should have been defaulted over time to 60% cash and 40% bonds, rather than 25% and 75% respectively. To make matters worse bonds yields rose in reaction to some Trump tweets, and 75% of her fund had fallen by 2-3%.

The Solution

This situation arose from an an anomaly in the pension tax code.  There are two options when it comes to calculating the tax free lump sum, firstly using a calculation based on length of service and level of pay and secondly  

by simply taking 25% of the accumulated fund.  The former calculation means than many people have varying amounts of tax free lump sum, ranging in some cases up to 100%.  The solution was clear to us – open numerous lifestyle paths, each catering for varying amounts of tax free cash – Personalised Lifestyling and remove the old default of 25% cash and 75% bonds.

Our Approach

Once provided with the personal information for each member, we ran a number of projections for each person and quickly identified the way each member was likely to take their benefits.  We then established separate lifestyle paths and aligned the members to the nearest corresponding path. We undertook an extensive communications programme to members which included new explanatory booklets, investment guides and a series of meetings and workshops around the country. Member assets were then transferred to the appropriate Lifestyle path.

The Outcome

Members were surprised that we had taken the trouble to work out the way in which they were expected to take their benefits at retirement.  Typically;

  • Members became better engaged as the personalisation of investments drove home the message about personal responsibility.

  • Some asked for assets from previous pension plans to be taken into account which altered the projected outcomes and subsequently transferred these amounts into the plan.

  • Member expectation were managed according to the investment path appropriate to their specific needs.

  • The Trustees were happy that members were not exposed to unnecessary risks.

2018-09-13T12:09:44+00:00