A well diversified target-date fund provides UK defined contribution (DC) savers with a greater likelihood of crossing the retirement finish line than lifecycle structures, according to JPMorgan Asset Management.

The research shows that using a target-date fund increased the median pot size at retirement and took members across the finish line in 76% of potential outcomes, 16% higher than investing in a lifecycle balanced fund - a popular default fund choice amongst UK pension plans. The analysis also demonstrated that target date funds can offer a more consistent and tighter range of outcomes.

“The UK pension landscape is changing and the investment options available to savers are evolving to support this. We don’t yet know exactly what the UK pension market will look like in five years, so it is paramount to have investments that are dynamic enough to change and evolve with the market. For us this means target date funds, lifecycle being too inflexible and slow to adapt,” said Simon Chinnery, head of UK DC at JPMorgan Asset Management.

“Over the coming years, DC investing is likely to represent many people’s best chance to maintain their standards of living in retirement. It is therefore vital that plan sponsors make the right choices for their DC defaults to enable as many scheme members as possible achieve a suitable income level to be able to retire.”

Target-date funds are optimal because they can offer more sophisticated diversification and flexibility due to their single-fund, single-manager structure, while active asset allocation helps increase the likelihood of success. 

The investment vehicle also offers significant advantages in terms of scheme governance and member communications, freeing plan sponsors up to focus their efforts on improving savings behaviour.

While lifecycle can provide strong returns in ideal market conditions, mechanistic de-risking, across the most prevalent types of lifecycle structures, often falls short in helping members to secure adequate levels of replacement income at retirement. The research shows that the wide dispersion of outcomes and the limited diversification offered by many lifecycle structures expose too many members to significant risk of falling short of their replacement income needs.