A flexible approach is critical for today’s pension savers

The pensions landscape is evolving, with new government legislation, changes in the behaviour of plan members and ongoing market uncertainty.

The 2014 Budget announcement means pension savers no longer have to buy an annuity at retirement. This is a radical shift that will have a significant impact on defined contribution (DC) pension plans.

DC plans need to be able to adapt quickly and efficiently to this dramatic change so that members can benefit from the new opportunities that it creates.

Target date funds flexibly adjust their asset allocation over time, ensuring members always have an appropriate mix of assets in their portfolios as they move towards retirement.

FLEXIBILITY to react to regulatory change

What you need to know:

Target date funds can quickly and efficiently change their glide path to ensure members are well positioned to cope with recent changes to the pensions landscape.

Because there is no need for members to be consulted and because the funds are managed by professional fund managers, portfolios can be changed more quickly and more effectively than in many other default fund structures.

This flexibility frees up DC plans to focus their efforts on key priorities such as raising member contribution levels.

Target date funds can adapt quickly to reflect changes in pension regulation, without triggering the time consuming member communications that may be necessary in a lifecycle structure.

FLEXIBILITY for plan members

What you need to know:

Changing lifestyles and rising life expectancy mean many people are rethinking how and when they retire. In lifecycle structures, members who want to keep working may face tough decisions about where to allocate pension savings currently invested in bonds and cash.

In target date funds, members typically have a five-year retirement window around their target date, providing a higher level of flexibility to stagger retirement, or work for longer.

If they need to change their retirement date significantly, members can simply switch to a fund with a later target date, ensuring that they maintain an appropriately diversified portfolio for that stage of their working lives.

Members are increasingly going to need their pension plan to provide greater flexibility around retirement dates.

A flexible glide path

The chart shows a typical target date fund glide path (the changing mix of assets that the fund invests in as it progresses to its target date). Along the journey to retirement, target date funds can adjust their asset mix to reflect regulatory developments, changes in member behaviour, evolving long-term market conditions and new investment opportunities.

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FLEXIBILITY to maintain the most appropriate asset mix

What you need to know:

In target date funds, asset allocation evolves gradually along the journey to retirement. The aim is to provide the right asset mix for members retiring over a typical timeframe of five years.

This means that target date funds can adapt their glide paths to reflect long-term changes in member behaviour, as well as changes in expectations for long-term asset class returns.

If members change their behaviour—for example if there is a broad move to increase contributions (or perhaps reduce them)—or if long-term return forecasts change significantly, the target date fund can reflect the change in the glide path design and asset allocation.

Members need funds that provide them with an optimal asset mix at all times, whatever stage they are in their working lives.

FLEXIBILITY to adapt to market trends

What you need to know:

Target date funds allow fund managers to adapt the exposures to different asset classes to reflect new investment opportunities and mitigate risk in volatile markets.

Many target date funds employ active asset allocation, meaning that they can be more market aware and flexibly change their short-term investment exposures to reflect macroeconomic trends.

And because they are professionally managed by a single manager, they can respond to these shifts in the market backdrop quickly and efficiently, without triggering time consuming member consultations that may be necessary in a lifecycle structure.

In today’s volatile and complex global markets, members require funds that can react to short-term market events, without deviating from their long-term glide path.

Is your default pension fund flexible enough?

Consult our checklist to see how your current default option compares with the flexibility of target date funds:

  • Does it have the ability to change easily to reflect regulatory developments?
  • Can it react efficiently to changes in member behaviour?
  • Can it adapt to significant changes in market conditions?
  • Is it able to change quickly to capitalise on new investment opportunities?

To find out more about target date funds, visit http://www.jpmorgan.co.uk/tdf or email dc.uk.team@jpmorgan.com