The glidepath to retirement is arguably the most complex and important phase of the default investment strategy proposition. Funds are at their biggest and time to recover from negative shocks is limited. Derisking has been made considerably more complex since pension freedoms liberated the decumulation process. Rather than targeting annuity hedging, defaults now have to interpret the likely behaviour of their member population at retirement when choosing between cash, annuity or remaining invested through drawdown. Target date fund providers argue it is against this backdrop that their funds have an edge, as they can adapt their derisking strategy to the changing needs of different cohorts reaching retirement. Their derisking strategies tend to start much earlier than schemes offering a lifestyle approach, although the switch away from equities is made very gradually at first.
LifeSight runs the longest derisking strategy, starting 25 years out, while Fidelity operates the shortest, at 2 years. L&G’s default does not de-risk its members at all, maintaining its equity exposure right up to retirement date. Instead it follows the strategy of prompting members to actively consider their options from age 50 onwards. The average scheme starts derisking seven years out (data to 31.3.18).