Hargreaves Lansdown warns employers that ‘lifestyled’ pension funds could fall by a quarter as bond markets face end of QE

24th June 2013

Hargreaves Lansdown is warning employers about the risks associated with lifestyling their pension fund offerings. The firm points out that lifestyle funds which generally increase the proportion of bonds investors hold as they move towards retirement may not be the best strategy in the current economic and political climate.

HL points out that ‘Lifestyle’ funds have fallen by 5 per cent on average since 1st May 2013 according to Lipper Hindsight. It also warns that a sharp rise in gilt yields could trigger double digit losses for investors in these funds.

Hargreaves estimates that 750,000 individuals are invested in these funds, with a further 1.5 million set to enter them in the coming decade. The firm made the calculation using data from ONS, the Pensions Regulator and the ABI.

Hargreaves has published its view on the matter at corporate.hl.co.uk/lifestyling . It discusses the benefits and limitations of lifestyling as well as alternative strategies.

Laith Khalaf, Head of Corporate Research at Hargreaves Lansdown says: “Employers should look long and hard at the lifestyling strategy used in their group pension schemes. These strategies have done very well to date but looking forward there is a big risk they will disappoint pension savers. Employers need to be aware of the advantages and drawbacks of their selected default approach.’

Of course as HL explains, lifestying should generally work in most market conditions and certainly proved to be a clever strategy (with hindsight of course) in recent years as bond prices have surged.

But HL warns that the last few months have seen a turnaround in fortunes for lifestyle funds however. “Markets are starting to contemplate the end of the international QE party as US policy makers have started to talk about ‘tapering’ stimulus measures.  In response the 10-year gilt yield has risen from 1.65% at the beginning of May to 2.3% now. Over the same time lifestyle funds have fallen 5% in value.”

“The recent slide in the bond market may not be the start of a sustained trend as long as central banks keep interest rates low. However if and when yields start to rise, lifestyle fund investors are likely to suffer as a result.

“It is difficult to quantify what the damage might be, much will depend on the extent and speed of any rise in yields. As an illustration, if yields were to rise quickly to pre-financial crisis levels (when the 10-year gilt yielded around 5%), it would not be unreasonable to expect a 25% fall in the value of a typical lifestyle fund.”

Mindful Money View:

Although this note is primarily aimed at employers, if you have concerns about this, it may be wise to check where and how you are invested in terms of any defined contribution workplace pension, though before a change in strategy or switch of fund, it is best to seek advice. That actually applies to your own investments not organised through your employer as well. It may be worth giving them the once over to check on your bond exposure and to see that you are comfortable whatever level of exposure you have.

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