Default solutions need to be amended to take account of the changing use of funds at retirement since Freedom and Choice was introduced, Zurich has said.
The insurer said many old default solutions are not designed to reduce allocation to risky assets, such as equities, as someone approaches age 55 and warns that, now Freedom and Choice allows savers to access funds at this age, they may be over-exposed to risky investments.
Zurich has been reviewing default solutions on its contract-based auto-enrolment (AE) schemes, concluding that providers need to revisit the defaults and adapt them in the post-freedoms environment.
Head of corporate market management Martin Palmer said the risk structure of these defaults could also impact on members' retirement funds, particularly if markets tank.
"Because of the nature of de-risking, a lot of the old default structures had a very short period of de-risking that would be largely invested in equities up to five years from retirement," he said. "Increasingly people - instead of taking money as originally planned at 60 or 65 - are taking the money at 55.
"If they are going early, the risk is they would probably be 100% invested in equities at that point in time. If the markets fall just before that point in time, that could have a sizable impact on the amount of money they are going to get."
Communicating with members about regularly checking and updating their expected retirement date would help providers manage the risk to funds better.
The insurer added, however, that updating default funds may not be possible for some older schemes whose terms of conditions do not allow for default funds to be modified for existing customers.
"The big challenge is about what happens for members in old default solutions," Palmer continued. "Members will be in a solution which was created five or 10 years ago, and that may have been appropriate at the time.
"Because some schemes were set up with terms and conditions that don't allow them to make changes to default solutions for existing members, we can only make the change for existing members."
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