Retirement savers set to lose millions due to over cautious fund placements

Workers saving for their retirement via workplace pensions may lose millions due to pension providers automatically choosing low-risk funds.

Worrying new research has shown that almost all workers enrolled in workplace pension schemes are automatically rerouted to a default lifestyle fund once they approach their retirement age. A report put together by the Pension Policy Institute shows 99.7 per cent of master trust members and 94 per cent of members of group personal pensions have been placed in a default fund.

According to PPI policy research chief Daniela Silcock, most default funds found in GPP and master trust funds are ‘lifestyled’. She believes those who are planning to continue investing after they’ve retired could get more benefit from a fund aimed at prioritising growth even in later years. Lifestyling is a strategy intended to reduce the risks of funds losing capital just prior to the retirement date, causing money to be switched away from volatile assets such as stock and shares into safer investments including fixed interest bonds and cash. The strategy is suitable for retirees planning to purchase annuities, but far less so for those intending to keep their pension pots invested and use drawdowns as retirement income.

Concerns about the practice of lifestyling and its effect of reducing millions of workers’ retirement savings have caused the UK’s Financial Conduct Agency to send instructions to pension providers and financial advisers to examine whether the strategy is suitable for all retirement savers. However, some investment providers are hitting back, saying low-income savers with low risk appetites are more likely to opt out of pension savings early after experiencing losses, and should be provided with effective, less risky default options early on in their savings plans.

This, they say, would lower the risk of compounding the UK’s long-term savings problem. However, for those approaching retirement and planning to take the expat route, the stagnation over the pre-retirement years of their investments may mean losses they can ill-afford when they transfer their pensions offshore.