Target Date Investing
Target Date Investing – TDI to those in the investment knowledge loop – is a new idea on the pensions’ scene. And like so many novel concepts, it has flown across the Atlantic.
TDI refers to collective funds which are organised according to your assumed retirement date. So a fund manager could offer TDI 2025, TDI 2030 and so on.
Many pension savers like them because they offer a constant game plan, which is individual in so far as it applies to your selected retirement date, but where each fund is also big enough to ensure economies of scale in fund management.
They are likely to form an important part of the government’s NEST investment for those in auto-enrolment as the default strategy. It’s for those who don’t want to make decisions or risk anyone else making a choice which could turn out badly.
The funds will concentrate on equities in the early years when time is on the holder’s side and risk can be absorbed over the years, moving to bonds and cash in the later years as ‘capital preservers’.
A lot of this sounds like ‘Lifestyle Pensions’. So what’s the difference?
Lifestyle investing normally covers just the final five to ten years before retirement – it involves switching from other strategies and is optional. TDI covers the entire pensions saving period – and that could easily be 50 years.
Lifestyle is individual as each plan is tailored by pension companies or advisers. TDI is a mass market product – everyone likely to retire in the same year, say 2040, will be in it together. So TDI is much cheaper, with competition between fund managers helping to keep prices low.
Once a saver is in TDI, it’s hard to get out, whereas Lifestyle is all about options and personal choice. In any case, what a future pensioner does ahead of lifestyle is up to them, whereas the TDI manager holds all the controls, preventing investors getting caught up in ‘flavour of the month’ funds which turn sour soon after.
Both use the ‘glide path’ theory. This is where the plane/fund comes in for a very soft and managed landing in the right place at the right time.
So what are the criticisms?
Fund managers could get paid for doing very little – just relying on inertia to carry investments forward and inertia on the part of fund purchasers who just want someone else to make the decisions.
Funds can never have 20-20 vision into the future. Where they appear to do so, it’s just luck. TDI demands that managers take anything up to a 50 year view and that’s bound to be extremely hazy. Managers understand this and will therefore take the easy option of ultra-cautious conservatism.
It’s not for larger or more sophisticated investors but TDI fans never claim that.
Pensions freedom, plus other social trends such as moving from full time to part time as you age or having a portfolio of jobs or being self-employed, means that the concept of a fixed retirement age is increasingly redundant.
Of course, some of these negative points emerge from advisers and others who are not needed as much if pension buyers adopt a TDI strategy.