Property
“We’re seeing a huge appetite for property in pensions, due to the recently buoyant market. It’s very risky – we shouldn’t forget the mistakes of the past property crash. Also, we don’t recommend an over-concentration in any asset class. Direct property investments can seem like a good idea to provide high return, however, they are costly (acquisition costs, property management fees, ongoing repairs, service charges) and a risky investment.”
Paula Finlay, financial planning specialist, Davy
Multi-manager solutions
“Multi-manager solutions are more prevalent – these strategies allocate money to a range of fund managers who specialise in certain disciplines. It assumes that no one fund manager is highly skilled at investing in all areas – we aim to find the best bond managers and allocate to them. In effect, you are looking for an ‘all-star team’ of fund managers.
“The next challenge is to ensure that fund managers do not take on undue risk and that they continue to manage within the guidelines you agree. We monitor our team of fund managers and adjust allocations to or remove fund managers if performance is not up to our standards over time.”
Bernard Walsh, head of Pensions & Investment, Bank of Ireland
Last-minute funding
“The tax reliefs associated with pensions are very attractive. Those that are nearing retirement who have cash know that the working finishing line is in sight. Private individuals can put up to 40 per cent of salary into their retirement pot and claim top-rate tax relief, knowing that they will not have to wait long to get access to their money.
“Company directors, with the required level of service, can use the pension system to extract money from the business in a tax-efficient manner. We are seeing an increased number of company directors, in companies holding high levels of cash, maximising their contributions to their retirement fund. Some are very risk-averse and choose low-risk investment strategies, looking to maximise the tax benefits, more so than achieving growth.”
Bernard Walsh, Bank of Ireland
Focus on digital communications and engagement tools
“With the move towards defined contribution (DC) schemes, we are seeing developments in digital communications and engagement tools for members. In the world of auto-enrolment, this is likely to become an ever more important feature of providing cost-effective supports for members.
“One example of the more cutting-edge developments is personalised videos which educate members in a visual manner on their own position – making the message more relevant and more likely to drive action. Early experience in this area is that personalised messaging is much more likely to drive action by members, particularly where it is twinned with an easy mechanism to make changes like increasing contributions.”
Trevor Booth, chief executive, Mercer
Choosing an ARF rather than an annuity at retirement
“Defined contribution members have the option, after taking their retirement lump sum, of using their accumulated retirement account to purchase a lifetime income called an annuity or of investing their retirement account in an approved retirement fund (ARF).
“The proportion of retirees choosing an ARF has increased and the number choosing an annuity has fallen over the past seven years. The reasons for this are, first, that the rules for accessing ARFs have been progressively relaxed and second, the cost of annuities has risen such that individuals might need to live well into their 90s to see reasonable value from them.
“There is, however, an anomaly in pension rules whereby if you are entitled to and take a lump sum greater than 25 per cent of the retirement account, then you can only use the balance to purchase an annuity, which is forcing some retirees to purchase an annuity when they would prefer an ARF.”
Trevor Booth, Mercer
Taking a transfer value from a DB scheme to access ARF options
“Increasing numbers of defined-benefit scheme members are choosing the option to take a transfer value from the defined benefit scheme into an alternative pension arrangement.
“This is being driven by a number of factors. In some cases, it is being incentivised by employers. Sometimes, the member wishes to access an ARF at retirement. Sometimes, the member can obtain a higher retirement lump sum by transferring.
“Where this option was explored by only a minority of members five years ago, this is now a regular part of the conversation between members and their advisers on retirement. Some trustees have even started providing information on the transfer value at retirement as a matter of course. Currently, it is not possible to access the ARF option directly from a defined-benefit scheme, however, there are increasing calls for this rule to be relaxed in the future.
Trevor Booth, Mercer