On the provider side meanwhile, Tim Banks, head of DC sales and client relations at AllianceBernstein, which runs flexible target date funds for 14 clients in the UK, says from his experience to date the idea generation for using TDFs has typically come from sponsors or trustees rather than consultants.
“Our funds are rated by consultants, but by no means all consultants,” he says. “We are seeing a shift in the distribution value chain in DC and some consultants want a play in more of the value chain. There are examples of large consultants who want to do more and shift from advising to being a product provider.”
Yet Blackrock head of DC business development and strategy Paul Bucksey says most, if not all, new DC business comes via consultants. “Consultants have a valuable place in the value chain and still have a role to play if a client picks a target date solution, it’s just another part of their armoury they can take to clients,” he says.
Interestingly, Legal & General Investment Management head of DC distribution and product strategy John Tsalos explains he is in fact seeing demand for TDFs from some consultants, but is quick to point out not all consultants see them as the way forward.
“However, in my discussions with consults some have expressed the view that they would genuinely like to be able to offer their clients a full range of investment solutions from a number of credible providers in order to ensure they meet the divergent needs of their clients,” he adds.
If it ain’t broke, don’t fix it
But it is not just the consultants who have to be convinced about the merits of TDFs. If a scheme has been running a lifestyle strategy for a number of years then the case for changing to TDFs would have to be compelling in order to outweigh the complexity and administrative burden attached to switching the entire membership across.
“Given the UK has always had a glide-path mechanism through lifestyle, I don’t think people have felt TDFs are bringing a lot more to the party, but are bringing operational issues,” says Mercer’s Douglas.
Another key reason for the slow uptake is the radical shift in the past few years from trust to contract-based and from unbundled to bundled DC. As DC provision has become more contract-based, asset managers have encountered difficulty getting TDFs onto insurers platforms.
“A lot of the market is through insurance companies,” says AllianceBernstein’s Banks. “And insurance companies need to be convinced there is a demand from clients.”
However, Banks says this is changing and AllianceBernstein TDFs will be appearing on two of the UK’s biggest insurers’ platforms later this year.
In favour of TDFs from the bundled point of view, lifestyle can be seen as operationally cumbersome. To illustrate this, LGIM’s Tsalos says L&G has around 3500 bundled DC schemes, with the majority in lifestyle strategies. Potentially each employer could have a different lifestyle strategy, meaning L&G is managing 3500 different investment strategies. With TDFs on the other hand, there could be a single fund for each year for, say, the next 50 years. This would involve just 50 different profiles, with all assets in one underlying structure.
To reflect this trend, Blackrock recently decided to extend the reach of its Lifepath TDFs to bundled DC. This is a reaction to an anticipated increase in demand with autoenrolment, which it believes will see the assets in UK TDFs quadruple to £8bn by 2018.
Blackrock’s Bucksey says: “Our experience post-2009 is that more of the new money coming into the firm has been lifestyle, custom built per client having taken advice from a consultant. One of the reasons target date funds haven’t really taken off yet is they haven’t been available to bundled clients.
“We’re changing that and expect take up of target date funds to increase as a result.”
Another shift which will drive the demand for TDFs is the at-retirement shift from annuitisation to flexible drawdown. Currently, most DC retirees buy an annuity, which leaves the member to make possibly the biggest investment decision they will ever have to make on an individual basis, but in the next decade or so more members are expected to stay invested and enter into flexible drawdown. Through a TDF structure members can move from accumulation through to decumulation and annuitisation all within one product – an appealing proposition for asset managers and perhaps incentive to get involved in this market.
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