Pension reforms 'will lead to investment strategy changes'

Two-thirds of defined contribution pension schemes are expected to change their default investment strategy within the next 18 months following the host of pension changes announced in this year’s Budget, a poll has found.

Asset management firm SEI surveyed 61 trustees and employers, who oversee pension assets ranging from £10m to £100m, to identify their current approach to defined contribution pension scheme governance and reaction to the pension reforms.

The examination found that over half - 52% - of trustees operating trust-based pension schemes are planning to implement changes, which will end the obligation to buy an annuity with pension savings.

SEI head of solutions in Europe, the Middle East and Africa Ashish Kapur noted that people are living longer and working more flexibly. Therefore, a default investment strategy that targets an annuity purchase at retirement ignored the fact that the majority of DC scheme members might not stop working suddenly, or require access to their pension money immediately.

'It is important to review a member's DC scheme default to make sure there is an appropriate strategy leading up to and after retirement,' he said.

'Additionally, there will be a growing demand for alternatives to annuities, as many individuals regard pension accounts as another savings vehicle from which to withdraw monies as and when needed.

'The DC landscape is transforming inexorably and, following the successful launch of auto-enrolment, employers, trustees, and master trusts now need to evaluate how their schemes can accommodate greater flexibility. Effectively communicating these changes to scheme members will be key.'

The survey also highlighted that 62% of those polled expect pension scheme members to use flexible drawdown, while only 25% said they believe members would purchase an annuity.

More than half (55%) said members might withdraw a tax-free cash sum, while keeping the remainder invested until future needs arise. Around two-fifths (40%) said members would choose to receive the entire pot as a cash lump sum.