Target-date funds are enjoying a moment in the sun as U.K. corporate retirement plans begin to use them as a result of pension freedoms adopted in 2015.
These vehicles are a familiar feature of defined contribution plans in the U.S., where they grabbed some 18.4% of the $3.28 trillion total defined contribution assets among the largest plans in 2016, according to Pensions & Investments' annual survey of the largest U.S. retirement plans.
But they've lagged in the U.K., largely because plan members were obliged to purchase annuities upon retirement, rather than keeping their retirement assets invested. The U.K.'s pension freedoms legislation gave members more flexibility in their retirement options, including a drawdown option that allowed participants to take a portion of their money in a tax-free lump sum and keep the remainder invested.
Early target-date fund adopters in the U.K. were multiemployer DC plans known as master trusts, such as the £1.8 billion ($2.3 billion) National Employment Savings Trust, London. But the vehicles now are attracting the attention of U.K. corporate plans.
Money managers say they are beginning to find target-date fund business with multinational companies in the U.K., which are keen on centralizing retirement plan practices.
Alistair Byrne, head of European DC investment strategy at State Street Global Advisors in London, said a few of the firm's clients — retirement plan executives at U.S.-based companies — have started to adopt target-date funds for global operations, particularly their U.K. subsidiaries. "There are more clients in the pipeline that are about to pull the trigger," Mr. Byrne added. He would not name the clients.
Pension plan executives and consultants in the U.K. said a new role is emerging for target-date funds, where they could add value by helping participants manage their assets through retirement.
Sonia Kataora, associate at actuarial consulting firm Barnett Waddingham in London, said: "In light of pension flexibilities introduced by the pension freedoms legislation ... target-date funds can also manage members past a target date. They are useful for income drawdown when derisking is still to a target date but the investment strategy needs to continue beyond that."