Thought Leadership

Osborne throws down a pre-retirement challenge

The Chancellor, George Osborne, has fundamentally changed the pensions landscape with his Budget announcement heralding the lifting of restrictions on how pension savings can be spent. 


Tim Horne

Tim Horne

Head of UK Institutional Defined Contribution

The Chancellor, George Osborne, has fundamentally changed the pensions landscape with his Budget announcement heralding the lifting of restrictions on how pension savings can be spent. The removal of the old presumption in favour of annuities means, we believe, that ‘pensions’ will increasingly be seen less as a way of creating an income in retirement and more as a flexible savings vehicle, as they are in the US.

Trustees and others involved in defined contribution pensions are clearly bracing themselves for the challenge. An overwhelming majority is now expecting to have to offer multiple default approaches for members in the last stages of their career before retirement. We believe that is realistic. Defaults will now have to match the freedoms members will have over their pension pots – take the cash, move into drawdown, buy an annuity or use a combination.

We believe that flexibility will be crucial for most older members in this new environment. They will need to preserve their wealth in the last five to 10 years from retirement to give them the widest range of options when work stops. Any default fund will therefore need to offer fairly solid protection against unwelcome market falls – after all, a member approaching retirement would find it hard to recover from losses such as those experienced in 2008. But to truly preserve wealth, his or her fund will also need to combat the corrosive effects of inflation. So the member may have to accept some risk if they are to generate the inflation-beating growth they need.

We think such an inflation-plus target should be entirely achievable using a low-risk, diversified, multi-asset portfolio. By adding a variable volatility overlay, we think it would be possible to provide a mechanism aimed at putting a floor under losses. Of course, some members may know in advance that they will want to buy an annuity. They may have paid off their mortgage or expect to realise cash from other sources. For them, a fund that removed some of the uncertainty about the level of annuity they could expect might provide peace of mind in the run-up to retirement. We believe a portfolio built around an intelligent gilts-based benchmark that reflected the expected annuity cash flows of these older members would give just the reassurance they need.

Whatever individual members decide, we believe the Osborne reforms could provide a much-needed spur to pension saving. Now both providers and trustees need to rise to the challenge, starting a conversation to see how new investment solutions can create the sort of defaults that members need to exploit this new environment effectively

To discuss the themes in this article further, please contact Tim Horne, Defined Contribution Investment Solutions Manager at Schroders, on +44 (0)20 7658 4877 or email

About us
Schroders is a global asset management company with £268.0 billion under management and an international network spanning 37 offices in 27 countries. We have significant experience of managing DC assets and of helping scheme managers, trustees and sponsors to operate pension schemes efficiently. We manage assets for DC pension schemes in the UK and also have relationships with institutional investment platforms. With more than £36 billion in assets, managed on behalf of both defined benefit and defined contribution pension schemes in both the corporate and public sector, UK pension funds form a significant proportion of our global client base.

Source: Schroders, at 31 March 2014.

Important information: The views and opinions contained herein are those of Tim Horne, Defined Contribution Investment Solutions Manager at Schroders, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. For professional investors and advisers only. This document is not suitable for retail clients. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. For your security, communications may be recorded or monitored. INS03083 w45553