The United Utilities Pension Scheme is looking to implement a secondary default investment fund, catering to members who wish to use income drawdown, over annuities, in retirement.
The defined contribution (DC) trust scheme is run alongside a legacy defined benefit (DB) scheme, and currently has around 3,800 members, with £60m (€73m) in assets.
However, annuity rates in the UK, which are linked to government bond yields, have plummeted since the advent of quantitative easing.
This, alongside pots in the scheme reaching a large enough size for income drawdown to be viable, has led the scheme to contemplate a secondary offering.
Over 2013, the scheme worked with financial advisers, Hargreaves Lansdown, which provide at-retirement advice on behalf of the company, giving members more options than simple annuity brokerage.
Income drawdown allows a member to take income from a fund while still remaining invested, unlike an annuity that converts into an insurance contract.
However, with the scheme’s current default DC investment fund following the traditional lifestyle matrix, Steven Robson, who heads up the pensions team at United Utilities, said the strategy did not match requirements.
“If members aren’t aware of drawdown, their investments gradually move into Gilts and cash,” he said. “But they might get close to retirement and decide drawdown is the right option.
“The money for the last few years has been invested in Gilts and cash. But that does not make sense if the member is not going to take an annuity and tax-free lump sum.”
Robson said the scheme was looking to set up a secondary default fund where the investments were more akin to an income-drawdown structure.
The scheme would have a conversation with members around the age of 50, prior to ‘lifestyling’ taking place, to discuss alternative options.
It would be run in addition to the present default fund, and separate fund choices available to members, as a secondary ‘income-drawdown lifestyle’ fund.
The fund would still need access to regular income and yielding assets, but can afford to carry more risk than a traditional lifestyle fund.
Robson said it would still avoid a majority equities structure, but carry more assets such as corporate bonds, diversified growth funds and property.
“It’s a more joined up process,” Robson said. “And we can make people aware at the right time to consider their options.
“Some members might not understand how to invest for drawdown. So this sets up an alternative choice for them, which trustees believe will work towards that option.”