Zurich warns of default risks created by pension freedom
Swindon, May 16, 2017
Leading UK pension provider Zurich has urged employers and advisers to review the risks faced by members in customised default solutions on auto-enrolment schemes.
The provider has warned that some older bespoke default solutions could be outdated since the pension freedoms, leaving members exposed to greater risk.
Martin Palmer, Zurich’s Head of Corporate Market Management, said: “Default investment solutions with short de-risking periods can involve a high level of risk for members who are intending to make the most of pension freedoms.
“Since the pension freedoms, the trend is for many members to withdraw their money in their 50s or early 60s. This means that waiting until 60 to move members out of riskier assets is likely to be too late, and could leave pot holders exposed to a greater level of risk.
“Consequently, if markets fall ahead of members taking their pot, they are likely to face reduced financially security in retirement.”
Zurich’s investment management team has been carrying out a review of the default solutions on its contract based auto-enrolment schemes.
The review, which has been supported by external investment modelling, is believed to be the industry’s first full review of a provider’s bespoke default investment solutions following the pension reforms.
Taking place across all contract based default investment solutions for auto-enrolment schemes, the review assesses whether members in the default solution are exposed to an appropriate level of risk.
“Pension providers have a governance responsibility to review not just their in-house default solutions but also the bespoke default solutions selected by employers,” Palmer said. “We are providing added support to schemes with bespoke defaults by reviewing the risk levels to ensure they continue to be suitable for default members.
“Where any bespoke defaults need updating, we will work with advisers and employers to help them adopt investment solutions that are more aligned to how members are taking advantage of the pension freedoms.”
Commenting on managed defaults, Palmer also said it was increasingly important that new defaults are future-proofed so that when changes are made they can be applied to both newly enrolled members and existing employees too.
He said: “The capacity for providers to make a change through ‘negative affirmation’ is dependent on the terms and conditions of the scheme and whether they are permitted to make the change without member consent.
“Some providers and schemes already have this ability. For others, I believe there is a need to review their terms and conditions to determine whether they are able to allow members to be automatically moved into new defaults, unless customers indicate that they want to stay in their existing solution.”
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