There is a feeling of unease among investors across the globe. The likelihood of a US recession is spooking markets, which have been volatile for the past few months, giving investors cause for concern and prompting many to reflect on their investment strategy.
A major question facing corporate intermediaries is how how much insulation should advisers and providers put into company pension plans? And should they do more to help employees make informed decisions on how to react to market volatility?
“The problem with money purchase schemes, whether they are trust-based or not, is that few employees actually understand them. In fact their level of ignorance on pensions is enormous,” says Mark Dampier at Hargreaves Lansdown. “This should not be a surprise bearing in mind the level of financial education in this country.”
Dampier cites the example of a recent pension seminar, where halfway through his talk he was asked by a 35-year old woman what an equity was. “This type of question gives you an idea of the problem. Most employees are not interested in their pension plan. It is too complicated, with loads of paperwork, and most pick the default fund anyway – usually the poorest choice.”
Andrew Merricks at Brighton based Skerritts Consultants reckons that the extent to which the adviser is involved with individual scheme members is largely down to the employer. “In my experience employers are happy to set a scheme up to cause as little hassle as possible. In these cases the sensible approach is to use a default fund for members, perhaps allowing interested individuals (of which there sadly appear to be few) to discuss a more personal approach to their pension planning.
He adds: “Some employers however are happy to arrange surgeries for their employees, and at these it is more feasible to advise on unique investment strategies for members. Even here though, I find that I’m more likely to be approached by someone in a company scheme who has received correspondence relating to their scheme, and wants advice from their own IFA about how to react to it.”
One of the biggest problems facing group pension scheme members is often the lack of availability of advice on investment options. Advisers and employees are caught between regulation, a need to educate and covering their own liabilities. Many employers don’t want to advise in any way simply because they feel that this puts a huge liability on them.
“Employers are not allowed to provide this advice and often the scheme advisers would not provide it anyway – so access largely depends on what is factored in to the scheme charges and fees,” says Lee Smythe at Killik & Co. “It is difficult to get an external adviser to provide this advice unless you are prepared to pay a fee for it (as no commission would be paid to them) or if the adviser is doing other things for you and agrees to cover the group pension investments as well.”
Advisers reckon that an increase in communication when investment markets are problematic would have little effect, and could end up being counter-productive. Few members even bother to review their annual statement. “I don’t think that there should be any special communication because of falling investment markets, but continual communication about the need to review their pension contribution, forecasted pension fund and ensuring that they have the appropriate asset allocation for the term and risk profile are important,” says Michelle Cracknell at Skandia.
Lifestyling has long been the answer to protecting those nearing retirement from market volatility. It is an issue that has once again been thrust to the fore because from 2012 all UK employers that plan to automatically enrol their workforce into an existing defined contribution scheme will have to offer a lifestyle default fund.
Lucien Carton, the Amsterdam-based global product specialist for lifecycle and structured solutions at ABN AMRO Asset Management, not surprisingly reckons that they have a role to play, in particular those offering capital protection and the lock-in of investment gains.
“The latest generation of lifecycle funds may hold a solution for investors’ problems. These funds not only offer the lifecycle mechanism, but also full capital protection and – sometimes – the lock-in of investment gains,” he says.
“Products such as these present a potential solution for those looking to protect their capital and meet their long-term savings plans. They could also be appropriate for investors who may be too impulsive; those who are too hasty in their equity market decisions and prone to short-term investment decisions when markets plummet or soar. These investors are protected from making decisions that can have potentially dire long-term consequences.”
Others are not as convinced about the merits of lifestyling. Some reckon that they do provide an element of risk reduction for those that do not have access to advice, but that they are unsuitable for those that go to an adviser. What’s more, it is not simply the case of having a lifestyle fund – it is the underlying assets that are key.
DC Link questions whether the average lifestyle option – consisting of three funds; equity, gilts and cash – is an appropriate portfolio for long term growth or just playing safe. Only a handful of schemes with the lifestyle option offer more than one equity and one gilt fund within the default; the majority of schemes have a standard offering of one balanced managed equity, one gilt and one cash fund. Just 2 per cent of lifestyle schemes offer a genuine choice of investments to account for differing attitudes to risk.
Conventional wisdom says that, as people grow older their pension fund should move into lower risk assets to protect the value of their pots. In other words, funds should have less exposure to equities and a higher exposure to fixed interest investments.
But times are changing. People are living longer, with many likely to work past the formal retirement age. Indeed, turning on the income tap may not necessarily be such a high priority for many in their early-50s. Even in the early 50s, there may still be a need to accrue capital. If people are still working, whether full or part time, it shouldn’t be necessary to generate maximum income from their portfolio, because if they take income unnecessarily it can have a detrimental effect on its value.
“Lifestyling is commendable stuff if you actually retire and secure your pension by an annuity purchase at a set date pre-determined potentially 40 years beforehand,” says Smythe.
“Otherwise, if you retire earlier, or later, the lifestyling will not have served its purpose. This is particularly the case if you have accrued a reasonably sized pension pot and you wish to take advantage of some of the more flexible retirement options – such as Unsecured Pension (USP) – where you may wish to maintain an invested fund and drawdown income for perhaps another 15-20 years. If prior to this you have been lifestyled in to fixed interest and cash you will probably end up having to reinvest in to the very type of funds you have been moved out of.”
With such employee apathy, asset allocation and the choice of funds available to employees are going to be ever more important. Many believe that as the comfort blanket of defined benefit pensions is pulled back increasing numbers of employees will become sensitive to downside market risk.
“The impact of market volatility – or indeed another protracted bear market – on employees’ confidence in their pension provision could therefore be far more acute than it has been during previous market downturns. It is vital that the asset management sector finds a core investment option that is more closely aligned with the needs and expectations of members than traditional ‘relative return’ investment options that have been inherited from the defined benefit market,” says Peter Ball, head of UK investment at JP Morgan AM.
The consensus is that advisers and providers should provide a suitable range of funds, both in terms of number of fund options and differing risk profiles, so that members can select a suitable investment strategy, taking into account the term of the investment and members’ tolerance for risk. This needs to take into account the profile of the members – too many funds can be off-putting and confuse the members. There also needs to be a suitable default fund option.
“Members needs to think about the appropriate asset allocation to suit the investment term and their tolerance for risk,” says Cracknell. “For example, a member is 25 years from retirement. He says he has a very low tolerance to risk. If he invests all of his money in a cash fund that returns just above inflation, at retirement his fund may be £105,000. Going for such a very low risk strategy over a reasonably long period is likely to mean that the member’s fund will not grow sufficiently. At the other end of the spectrum, if he invested in equities his fund at retirement may be £195,000 – almost double the return.”
Cracknell suggests that the right answer for this member is probably an asset allocation split between equities and fixed interest from between 80/20 to 50/50, depending on his attitude to risk now that he understands better the implications. “There is more gained from correct asset allocation than trying to pick prize-winning funds.” she says.
Jason Walker at AWD Chase de Vere also reckons that asset allocation is the only way to address market jitters concerns. “There is no way you can predict or react – it’s more about asset allocation. Alternatives include traded life funds, absolute return funds – being uncorrelated is the key.”
Traded life policies are huge in the US and is an asset class that promises a return that is uncorrelated to both equities and fixed income, while the new range of multi-asset cautious funds are getting attention in the UK. UCITs III and changes to non-UCIT retail funds rules has altered the landscape and given fund groups greater powers with their asset choice. It has given managers the opportunity to add funds of hedge funds and private equity to the mix of their cautious managed funds.
Investment markets can be volatile but historically, they have always tended to rise over time. “The amount of risk a scheme member should take depends heavily on how much time they have until they need to call on their pension fund. The more time they have, the greater the opportunity to ‘ride out’ any falls in the value of their chosen investment funds,” says Ball. “As a rule of thumb, anyone who has more than 10 years before they need to call on their pension pot can afford to take a relatively high level of risk. Anyone with less than five years should take far less risk.”
Ball also points out that market volatility has a bright side because when stock markets fall, an investor is able to buy more shares with their money – giving them a bigger pot from which to benefit when markets rise.
“When markets are volatile, regular monthly investors can even benefit from a phenomenon known as ‘pound-cost averaging’. This means their monthly investment buys more shares or fund units when prices fall, and fewer when prices rise, which means the average price they pay per share is lower than the actual average share price over the period they invest,” he adds. n
Jason Walker at AWD Chase de Vere also reckons
that asset allocation is the only way to address market
jitters concerns. “There is no way you can predict or
react – it’s more about asset allocation. Alternatives
include traded life funds, absolute return funds – being
uncorrelated is the key.”
Traded life policies are huge in the US and is an asset
class that promises a return that is uncorrelated to both
equities and fixed income, while the new range of multiasset
cautious funds are getting attention in the UK. UCITs III and changes to non-UCIT retail funds rules has altered the landscape and given fund groups greater powers with their asset choice. It has given managers the opportunity to add funds of hedge funds and private equity to the mix of their cautious managed funds.
Investment markets can be volatile but historically,
they have always tended to rise over time. “The amount
of risk a scheme member should take depends heavily
on how much time they have until they need to call on
their pension fund. The more time they have, the greater
the opportunity to ‘ride out’ any falls in the value of
their chosen investment funds,” says Ball. “As a rule of
thumb, anyone who has more than 10 years before they
need to call on their pension pot can afford to take a relatively high level of risk. Anyone with less than five
years should take far less risk.”
Ball also points out that market volatility has a bright
side because when stock markets fall, an investor is able
to buy more shares with their money – giving them a
bigger pot from which to benefit when markets rise.
“When markets are volatile, regular monthly investors can even benefit from a phenomenon known as ‘pound-cost averaging’. This means their monthly investment buys more shares or fund units when prices fall, and fewer when prices rise, which means the average price they pay per share is lower than the actual average share price over the period they invest,” he adds.
OPINION: PORTFOLIO FOR 10 YEARS OR LESS TO RETIREMENT
While 10 years before retirement is still a relatively long time in the investment markets if you do intend to buy an annuity at the end of the period you do need to be far more vigilant on your portfolio.
The Standard Life Dynamic Distribution Fund is a fettered fund of funds. In other words it uses other Standard Life funds. This in my view is one of the most improved groups in terms of investment performance over the last few years. This is illustrated by the fact that the Dynamic Distribution is the number one fund in its sector over the last year. The fund invests in a mixture of bonds equities and property with the aim of giving relatively low volatility but with an income of approximately 4 per cent.
M&G Global Leaders on the other hand is a full-blown international equity fund. The investment approach is very much looking for the best stocks rather than necessarily the best regions.
The Midas Balanced Income Fund has an investment strategy to create a balanced portfolio of assets with both market and non-market correlation along with a focus on reducing volatility risk and achieving real returns. The fund is invested across UK equities overseas equities government bonds property and other alternative investments.
Finally my choice of PSigma Income under one of the most experienced fund managers in the UK, Dr Bill Mott will be no surprise to those who know of Dr Mott’s excellent record at running these types of funds at Credit Suisse. The fund invests almost exclusively in the UK market looking for shares on a high yield that are out of favour.
Portfolio split
Standard Life Dynamic 30% Midas Balance Income 20% Psigma Income 20% M&G Global Leaders 30%
opinion Mark Dampier, head of research at Hargreaves Lansdown.
PORTFOLIO FOR 20-30 YEARS TO RETIREMENT
This portfolio has been put together on the basis of a time horizon of around 20 to 30 years plus. Given this length of time it seems only right to have a global emerging markets fund in this portfolio. The industrialisation and growth of areas such as India, China and Eastern Europe are having a big effect on the world economy.
The Aberdeen fund run by Hugh Young has been one of the market leaders for many years. The Aberdeen team look for high quality businesses with talented management priced at a level that undervalues its potential. Emerging markets are undoubtedly a high risk and volatile area given a team of 19 based in London and Singapore I believe you are in the hands of some extremely experienced professionals.
The Standard Life Investments Global Unconstrained Fund does as it might suggest invest on a global basis, looking to find the very best companies available.
I think the Skandia Global Best Ideas Fund fits into my next selection quite well. The money is allocated to 10 of the best fund managers in the industry and they are asked to produce their 10 best ideas. All these fund managers bar one are on our own Wealth 150 at the moment so I feel you are getting the best talents to run your pension fund by buying this fund.
My final choice is the Artemis Capital fund, which is largely a UK fund although some money is also invested in European stocks. These are by and large the larger companies rather than the more volatile smaller companies and it gives your pension fund access to the larger cap offerings in the UK.
There is a feeling of unease among investors across the globe. The likelihood of a US recession is spooking markets, which have been volatile for the past few months, giving investors cause for concern and prompting many to reflect on their investment strategy.
A major question facing corporate intermediaries is how how much insulation should advisers and providers put into company pension plans? And should they do more to help employees make informed decisions on how to react to market volatility?
“The problem with money purchase schemes, whether they are trust-based or not, is that few employees actually understand them. In fact their level of ignorance on pensions is enormous,” says Mark Dampier at Hargreaves Lansdown. “This should not be a surprise bearing in mind the level of financial education in this country.”
Dampier cites the example of a recent pension seminar, where halfway through his talk he was asked by a 35-year old woman what an equity was. “This type of question gives you an idea of the problem. Most employees are not interested in their pension plan. It is too complicated, with loads of paperwork, and most pick the default fund anyway – usually the poorest choice.”
Andrew Merricks at Brighton based Skerritts Consultants reckons that the extent to which the adviser is involved with individual scheme members is largely down to the employer. “In my experience employers are happy to set a scheme up to cause as little hassle as possible. In these cases the sensible approach is to use a default fund for members, perhaps allowing interested individuals (of which there sadly appear to be few) to discuss a more personal approach to their pension planning.
He adds: “Some employers however are happy to arrange surgeries for their employees, and at these it is more feasible to advise on unique investment strategies for members. Even here though, I find that I’m more likely to be approached by someone in a company scheme who has received correspondence relating to their scheme, and wants advice from their own IFA about how to react to it.”
One of the biggest problems facing group pension scheme members is often the lack of availability of advice on investment options. Advisers and employees are caught between regulation, a need to educate and covering their own liabilities. Many employers don’t want to advise in any way simply because they feel that this puts a huge liability on them.
“Employers are not allowed to provide this advice and often the scheme advisers would not provide it anyway – so access largely depends on what is factored in to the scheme charges and fees,” says Lee Smythe at Killik & Co. “It is difficult to get an external adviser to provide this advice unless you are prepared to pay a fee for it (as no commission would be paid to them) or if the adviser is doing other things for you and agrees to cover the group pension investments as well.”
Advisers reckon that an increase in communication when investment markets are problematic would have little effect, and could end up being counter-productive. Few members even bother to review their annual statement. “I don’t think that there should be any special communication because of falling investment markets, but continual communication about the need to review their pension contribution, forecasted pension fund and ensuring that they have the appropriate asset allocation for the term and risk profile are important,” says Michelle Cracknell at Skandia.
Lifestyling has long been the answer to protecting those nearing retirement from market volatility. It is an issue that has once again been thrust to the fore because from 2012 all UK employers that plan to automatically enrol their workforce into an existing defined contribution scheme will have to offer a lifestyle default fund.
Lucien Carton, the Amsterdam-based global product specialist for lifecycle and structured solutions at ABN AMRO Asset Management, not surprisingly reckons that they have a role to play, in particular those offering capital protection and the lock-in of investment gains.
“The latest generation of lifecycle funds may hold a solution for investors’ problems. These funds not only offer the lifecycle mechanism, but also full capital protection and – sometimes – the lock-in of investment gains,” he says.
“Products such as these present a potential solution for those looking to protect their capital and meet their long-term savings plans. They could also be appropriate for investors who may be too impulsive; those who are too hasty in their equity market decisions and prone to short-term investment decisions when markets plummet or soar. These investors are protected from making decisions that can have potentially dire long-term consequences.”
Others are not as convinced about the merits of lifestyling. Some reckon that they do provide an element of risk reduction for those that do not have access to advice, but that they are unsuitable for those that go to an adviser. What’s more, it is not simply the case of having a lifestyle fund – it is the underlying assets that are key.
DC Link questions whether the average lifestyle option – consisting of three funds; equity, gilts and cash – is an appropriate portfolio for long term growth or just playing safe. Only a handful of schemes with the lifestyle option offer more than one equity and one gilt fund within the default; the majority of schemes have a standard offering of one balanced managed equity, one gilt and one cash fund. Just 2 per cent of lifestyle schemes offer a genuine choice of investments to account for differing attitudes to risk.
Conventional wisdom says that, as people grow older their pension fund should move into lower risk assets to protect the value of their pots. In other words, funds should have less exposure to equities and a higher exposure to fixed interest investments.
But times are changing. People are living longer, with many likely to work past the formal retirement age. Indeed, turning on the income tap may not necessarily be such a high priority for many in their early-50s. Even in the early 50s, there may still be a need to accrue capital. If people are still working, whether full or part time, it shouldn’t be necessary to generate maximum income from their portfolio, because if they take income unnecessarily it can have a detrimental effect on its value.
“Lifestyling is commendable stuff if you actually retire and secure your pension by an annuity purchase at a set date pre-determined potentially 40 years beforehand,” says Smythe.
“Otherwise, if you retire earlier, or later, the lifestyling will not have served its purpose. This is particularly the case if you have accrued a reasonably sized pension pot and you wish to take advantage of some of the more flexible retirement options – such as Unsecured Pension (USP) – where you may wish to maintain an invested fund and drawdown income for perhaps another 15-20 years. If prior to this you have been lifestyled in to fixed interest and cash you will probably end up having to reinvest in to the very type of funds you have been moved out of.”
With such employee apathy, asset allocation and the choice of funds available to employees are going to be ever more important. Many believe that as the comfort blanket of defined benefit pensions is pulled back increasing numbers of employees will become sensitive to downside market risk.
“The impact of market volatility – or indeed another protracted bear market – on employees’ confidence in their pension provision could therefore be far more acute than it has been during previous market downturns. It is vital that the asset management sector finds a core investment option that is more closely aligned with the needs and expectations of members than traditional ‘relative return’ investment options that have been inherited from the defined benefit market,” says Peter Ball, head of UK investment at JP Morgan AM.
The consensus is that advisers and providers should provide a suitable range of funds, both in terms of number of fund options and differing risk profiles, so that members can select a suitable investment strategy, taking into account the term of the investment and members’ tolerance for risk. This needs to take into account the profile of the members – too many funds can be off-putting and confuse the members. There also needs to be a suitable default fund option.
“Members needs to think about the appropriate asset allocation to suit the investment term and their tolerance for risk,” says Cracknell. “For example, a member is 25 years from retirement. He says he has a very low tolerance to risk. If he invests all of his money in a cash fund that returns just above inflation, at retirement his fund may be £105,000. Going for such a very low risk strategy over a reasonably long period is likely to mean that the member’s fund will not grow sufficiently. At the other end of the spectrum, if he invested in equities his fund at retirement may be £195,000 – almost double the return.”
Cracknell suggests that the right answer for this member is probably an asset allocation split between equities and fixed interest from between 80/20 to 50/50, depending on his attitude to risk now that he understands better the implications. “There is more gained from correct asset allocation than trying to pick prize-winning funds.” she says.
Jason Walker at AWD Chase de Vere also reckons that asset allocation is the only way to address market jitters concerns. “There is no way you can predict or react – it’s more about asset allocation. Alternatives include traded life funds, absolute return funds – being uncorrelated is the key.”
Traded life policies are huge in the US and is an asset class that promises a return that is uncorrelated to both equities and fixed income, while the new range of multi-asset cautious funds are getting attention in the UK. UCITs III and changes to non-UCIT retail funds rules has altered the landscape and given fund groups greater powers with their asset choice. It has given managers the opportunity to add funds of hedge funds and private equity to the mix of their cautious managed funds.
Investment markets can be volatile but historically, they have always tended to rise over time. “The amount of risk a scheme member should take depends heavily on how much time they have until they need to call on their pension fund. The more time they have, the greater the opportunity to ‘ride out’ any falls in the value of their chosen investment funds,” says Ball. “As a rule of thumb, anyone who has more than 10 years before they need to call on their pension pot can afford to take a relatively high level of risk. Anyone with less than five years should take far less risk.”
Ball also points out that market volatility has a bright side because when stock markets fall, an investor is able to buy more shares with their money – giving them a bigger pot from which to benefit when markets rise.
“When markets are volatile, regular monthly investors can even benefit from a phenomenon known as ‘pound-cost averaging’. This means their monthly investment buys more shares or fund units when prices fall, and fewer when prices rise, which means the average price they pay per share is lower than the actual average share price over the period they invest,” he adds. n
Jason Walker at AWD Chase de Vere also reckons
that asset allocation is the only way to address market
jitters concerns. “There is no way you can predict or
react – it’s more about asset allocation. Alternatives
include traded life funds, absolute return funds – being
uncorrelated is the key.”
Traded life policies are huge in the US and is an asset
class that promises a return that is uncorrelated to both
equities and fixed income, while the new range of multiasset
cautious funds are getting attention in the UK. UCITs III and changes to non-UCIT retail funds rules has altered the landscape and given fund groups greater powers with their asset choice. It has given managers the opportunity to add funds of hedge funds and private equity to the mix of their cautious managed funds.
Investment markets can be volatile but historically,
they have always tended to rise over time. “The amount
of risk a scheme member should take depends heavily
on how much time they have until they need to call on
their pension fund. The more time they have, the greater
the opportunity to ‘ride out’ any falls in the value of
their chosen investment funds,” says Ball. “As a rule of
thumb, anyone who has more than 10 years before they
need to call on their pension pot can afford to take a relatively high level of risk. Anyone with less than five
years should take far less risk.”
Ball also points out that market volatility has a bright
side because when stock markets fall, an investor is able
to buy more shares with their money – giving them a
bigger pot from which to benefit when markets rise.
“When markets are volatile, regular monthly investors can even benefit from a phenomenon known as ‘pound-cost averaging’. This means their monthly investment buys more shares or fund units when prices fall, and fewer when prices rise, which means the average price they pay per share is lower than the actual average share price over the period they invest,” he adds.
OPINION: PORTFOLIO FOR 10 YEARS OR LESS TO RETIREMENT
While 10 years before retirement is still a relatively long time in the investment markets if you do intend to buy an annuity at the end of the period you do need to be far more vigilant on your portfolio.
The Standard Life Dynamic Distribution Fund is a fettered fund of funds. In other words it uses other Standard Life funds. This in my view is one of the most improved groups in terms of investment performance over the last few years. This is illustrated by the fact that the Dynamic Distribution is the number one fund in its sector over the last year. The fund invests in a mixture of bonds equities and property with the aim of giving relatively low volatility but with an income of approximately 4 per cent.
M&G Global Leaders on the other hand is a full-blown international equity fund. The investment approach is very much looking for the best stocks rather than necessarily the best regions.
The Midas Balanced Income Fund has an investment strategy to create a balanced portfolio of assets with both market and non-market correlation along with a focus on reducing volatility risk and achieving real returns. The fund is invested across UK equities overseas equities government bonds property and other alternative investments.
Finally my choice of PSigma Income under one of the most experienced fund managers in the UK, Dr Bill Mott will be no surprise to those who know of Dr Mott’s excellent record at running these types of funds at Credit Suisse. The fund invests almost exclusively in the UK market looking for shares on a high yield that are out of favour.
Portfolio split
Standard Life Dynamic 30% Midas Balance Income 20% Psigma Income 20% M&G Global Leaders 30%
opinion Mark Dampier, head of research at Hargreaves Lansdown.
PORTFOLIO FOR 20-30 YEARS TO RETIREMENT
This portfolio has been put together on the basis of a time horizon of around 20 to 30 years plus. Given this length of time it seems only right to have a global emerging markets fund in this portfolio. The industrialisation and growth of areas such as India, China and Eastern Europe are having a big effect on the world economy.
The Aberdeen fund run by Hugh Young has been one of the market leaders for many years. The Aberdeen team look for high quality businesses with talented management priced at a level that undervalues its potential. Emerging markets are undoubtedly a high risk and volatile area given a team of 19 based in London and Singapore I believe you are in the hands of some extremely experienced professionals.
The Standard Life Investments Global Unconstrained Fund does as it might suggest invest on a global basis, looking to find the very best companies available.
I think the Skandia Global Best Ideas Fund fits into my next selection quite well. The money is allocated to 10 of the best fund managers in the industry and they are asked to produce their 10 best ideas. All these fund managers bar one are on our own Wealth 150 at the moment so I feel you are getting the best talents to run your pension fund by buying this fund.
My final choice is the Artemis Capital fund, which is largely a UK fund although some money is also invested in European stocks. These are by and large the larger companies rather than the more volatile smaller companies and it gives your pension fund access to the larger cap offerings in the UK.
There is a feeling of unease among investors across the globe. The likelihood of a US recession is spooking markets, which have been volatile for the past few months, giving investors cause for concern and prompting many to reflect on their investment strategy.
A major question facing corporate intermediaries is how how much insulation should advisers and providers put into company pension plans? And should they do more to help employees make informed decisions on how to react to market volatility?
“The problem with money purchase schemes, whether they are trust-based or not, is that few employees actually understand them. In fact their level of ignorance on pensions is enormous,” says Mark Dampier at Hargreaves Lansdown. “This should not be a surprise bearing in mind the level of financial education in this country.”
Dampier cites the example of a recent pension seminar, where halfway through his talk he was asked by a 35-year old woman what an equity was. “This type of question gives you an idea of the problem. Most employees are not interested in their pension plan. It is too complicated, with loads of paperwork, and most pick the default fund anyway – usually the poorest choice.”
Andrew Merricks at Brighton based Skerritts Consultants reckons that the extent to which the adviser is involved with individual scheme members is largely down to the employer. “In my experience employers are happy to set a scheme up to cause as little hassle as possible. In these cases the sensible approach is to use a default fund for members, perhaps allowing interested individuals (of which there sadly appear to be few) to discuss a more personal approach to their pension planning.
He adds: “Some employers however are happy to arrange surgeries for their employees, and at these it is more feasible to advise on unique investment strategies for members. Even here though, I find that I’m more likely to be approached by someone in a company scheme who has received correspondence relating to their scheme, and wants advice from their own IFA about how to react to it.”
One of the biggest problems facing group pension scheme members is often the lack of availability of advice on investment options. Advisers and employees are caught between regulation, a need to educate and covering their own liabilities. Many employers don’t want to advise in any way simply because they feel that this puts a huge liability on them.
“Employers are not allowed to provide this advice and often the scheme advisers would not provide it anyway – so access largely depends on what is factored in to the scheme charges and fees,” says Lee Smythe at Killik & Co. “It is difficult to get an external adviser to provide this advice unless you are prepared to pay a fee for it (as no commission would be paid to them) or if the adviser is doing other things for you and agrees to cover the group pension investments as well.”
Advisers reckon that an increase in communication when investment markets are problematic would have little effect, and could end up being counter-productive. Few members even bother to review their annual statement. “I don’t think that there should be any special communication because of falling investment markets, but continual communication about the need to review their pension contribution, forecasted pension fund and ensuring that they have the appropriate asset allocation for the term and risk profile are important,” says Michelle Cracknell at Skandia.
Lifestyling has long been the answer to protecting those nearing retirement from market volatility. It is an issue that has once again been thrust to the fore because from 2012 all UK employers that plan to automatically enrol their workforce into an existing defined contribution scheme will have to offer a lifestyle default fund.
Lucien Carton, the Amsterdam-based global product specialist for lifecycle and structured solutions at ABN AMRO Asset Management, not surprisingly reckons that they have a role to play, in particular those offering capital protection and the lock-in of investment gains.
“The latest generation of lifecycle funds may hold a solution for investors’ problems. These funds not only offer the lifecycle mechanism, but also full capital protection and – sometimes – the lock-in of investment gains,” he says.
“Products such as these present a potential solution for those looking to protect their capital and meet their long-term savings plans. They could also be appropriate for investors who may be too impulsive; those who are too hasty in their equity market decisions and prone to short-term investment decisions when markets plummet or soar. These investors are protected from making decisions that can have potentially dire long-term consequences.”
Others are not as convinced about the merits of lifestyling. Some reckon that they do provide an element of risk reduction for those that do not have access to advice, but that they are unsuitable for those that go to an adviser. What’s more, it is not simply the case of having a lifestyle fund – it is the underlying assets that are key.
DC Link questions whether the average lifestyle option – consisting of three funds; equity, gilts and cash – is an appropriate portfolio for long term growth or just playing safe. Only a handful of schemes with the lifestyle option offer more than one equity and one gilt fund within the default; the majority of schemes have a standard offering of one balanced managed equity, one gilt and one cash fund. Just 2 per cent of lifestyle schemes offer a genuine choice of investments to account for differing attitudes to risk.
Conventional wisdom says that, as people grow older their pension fund should move into lower risk assets to protect the value of their pots. In other words, funds should have less exposure to equities and a higher exposure to fixed interest investments.
But times are changing. People are living longer, with many likely to work past the formal retirement age. Indeed, turning on the income tap may not necessarily be such a high priority for many in their early-50s. Even in the early 50s, there may still be a need to accrue capital. If people are still working, whether full or part time, it shouldn’t be necessary to generate maximum income from their portfolio, because if they take income unnecessarily it can have a detrimental effect on its value.
“Lifestyling is commendable stuff if you actually retire and secure your pension by an annuity purchase at a set date pre-determined potentially 40 years beforehand,” says Smythe.
“Otherwise, if you retire earlier, or later, the lifestyling will not have served its purpose. This is particularly the case if you have accrued a reasonably sized pension pot and you wish to take advantage of some of the more flexible retirement options – such as Unsecured Pension (USP) – where you may wish to maintain an invested fund and drawdown income for perhaps another 15-20 years. If prior to this you have been lifestyled in to fixed interest and cash you will probably end up having to reinvest in to the very type of funds you have been moved out of.”
With such employee apathy, asset allocation and the choice of funds available to employees are going to be ever more important. Many believe that as the comfort blanket of defined benefit pensions is pulled back increasing numbers of employees will become sensitive to downside market risk.
“The impact of market volatility – or indeed another protracted bear market – on employees’ confidence in their pension provision could therefore be far more acute than it has been during previous market downturns. It is vital that the asset management sector finds a core investment option that is more closely aligned with the needs and expectations of members than traditional ‘relative return’ investment options that have been inherited from the defined benefit market,” says Peter Ball, head of UK investment at JP Morgan AM.
The consensus is that advisers and providers should provide a suitable range of funds, both in terms of number of fund options and differing risk profiles, so that members can select a suitable investment strategy, taking into account the term of the investment and members’ tolerance for risk. This needs to take into account the profile of the members – too many funds can be off-putting and confuse the members. There also needs to be a suitable default fund option.
“Members needs to think about the appropriate asset allocation to suit the investment term and their tolerance for risk,” says Cracknell. “For example, a member is 25 years from retirement. He says he has a very low tolerance to risk. If he invests all of his money in a cash fund that returns just above inflation, at retirement his fund may be £105,000. Going for such a very low risk strategy over a reasonably long period is likely to mean that the member’s fund will not grow sufficiently. At the other end of the spectrum, if he invested in equities his fund at retirement may be £195,000 – almost double the return.”
Cracknell suggests that the right answer for this member is probably an asset allocation split between equities and fixed interest from between 80/20 to 50/50, depending on his attitude to risk now that he understands better the implications. “There is more gained from correct asset allocation than trying to pick prize-winning funds.” she says.
Jason Walker at AWD Chase de Vere also reckons that asset allocation is the only way to address market jitters concerns. “There is no way you can predict or react – it’s more about asset allocation. Alternatives include traded life funds, absolute return funds – being uncorrelated is the key.”
Traded life policies are huge in the US and is an asset class that promises a return that is uncorrelated to both equities and fixed income, while the new range of multi-asset cautious funds are getting attention in the UK. UCITs III and changes to non-UCIT retail funds rules has altered the landscape and given fund groups greater powers with their asset choice. It has given managers the opportunity to add funds of hedge funds and private equity to the mix of their cautious managed funds.
Investment markets can be volatile but historically, they have always tended to rise over time. “The amount of risk a scheme member should take depends heavily on how much time they have until they need to call on their pension fund. The more time they have, the greater the opportunity to ‘ride out’ any falls in the value of their chosen investment funds,” says Ball. “As a rule of thumb, anyone who has more than 10 years before they need to call on their pension pot can afford to take a relatively high level of risk. Anyone with less than five years should take far less risk.”
Ball also points out that market volatility has a bright side because when stock markets fall, an investor is able to buy more shares with their money – giving them a bigger pot from which to benefit when markets rise.
“When markets are volatile, regular monthly investors can even benefit from a phenomenon known as ‘pound-cost averaging’. This means their monthly investment buys more shares or fund units when prices fall, and fewer when prices rise, which means the average price they pay per share is lower than the actual average share price over the period they invest,” he adds. n
Jason Walker at AWD Chase de Vere also reckons
that asset allocation is the only way to address market
jitters concerns. “There is no way you can predict or
react – it’s more about asset allocation. Alternatives
include traded life funds, absolute return funds – being
uncorrelated is the key.”
Traded life policies are huge in the US and is an asset
class that promises a return that is uncorrelated to both
equities and fixed income, while the new range of multiasset
cautious funds are getting attention in the UK. UCITs III and changes to non-UCIT retail funds rules has altered the landscape and given fund groups greater powers with their asset choice. It has given managers the opportunity to add funds of hedge funds and private equity to the mix of their cautious managed funds.
Investment markets can be volatile but historically,
they have always tended to rise over time. “The amount
of risk a scheme member should take depends heavily
on how much time they have until they need to call on
their pension fund. The more time they have, the greater
the opportunity to ‘ride out’ any falls in the value of
their chosen investment funds,” says Ball. “As a rule of
thumb, anyone who has more than 10 years before they
need to call on their pension pot can afford to take a relatively high level of risk. Anyone with less than five
years should take far less risk.”
Ball also points out that market volatility has a bright
side because when stock markets fall, an investor is able
to buy more shares with their money – giving them a
bigger pot from which to benefit when markets rise.
“When markets are volatile, regular monthly investors can even benefit from a phenomenon known as ‘pound-cost averaging’. This means their monthly investment buys more shares or fund units when prices fall, and fewer when prices rise, which means the average price they pay per share is lower than the actual average share price over the period they invest,” he adds.
OPINION: PORTFOLIO FOR 10 YEARS OR LESS TO RETIREMENT
While 10 years before retirement is still a relatively long time in the investment markets if you do intend to buy an annuity at the end of the period you do need to be far more vigilant on your portfolio.
The Standard Life Dynamic Distribution Fund is a fettered fund of funds. In other words it uses other Standard Life funds. This in my view is one of the most improved groups in terms of investment performance over the last few years. This is illustrated by the fact that the Dynamic Distribution is the number one fund in its sector over the last year. The fund invests in a mixture of bonds equities and property with the aim of giving relatively low volatility but with an income of approximately 4 per cent.
M&G Global Leaders on the other hand is a full-blown international equity fund. The investment approach is very much looking for the best stocks rather than necessarily the best regions.
The Midas Balanced Income Fund has an investment strategy to create a balanced portfolio of assets with both market and non-market correlation along with a focus on reducing volatility risk and achieving real returns. The fund is invested across UK equities overseas equities government bonds property and other alternative investments.
Finally my choice of PSigma Income under one of the most experienced fund managers in the UK, Dr Bill Mott will be no surprise to those who know of Dr Mott’s excellent record at running these types of funds at Credit Suisse. The fund invests almost exclusively in the UK market looking for shares on a high yield that are out of favour.
Portfolio split
Standard Life Dynamic 30% Midas Balance Income 20% Psigma Income 20% M&G Global Leaders 30%
opinion Mark Dampier, head of research at Hargreaves Lansdown.
PORTFOLIO FOR 20-30 YEARS TO RETIREMENT
This portfolio has been put together on the basis of a time horizon of around 20 to 30 years plus. Given this length of time it seems only right to have a global emerging markets fund in this portfolio. The industrialisation and growth of areas such as India, China and Eastern Europe are having a big effect on the world economy.
The Aberdeen fund run by Hugh Young has been one of the market leaders for many years. The Aberdeen team look for high quality businesses with talented management priced at a level that undervalues its potential. Emerging markets are undoubtedly a high risk and volatile area given a team of 19 based in London and Singapore I believe you are in the hands of some extremely experienced professionals.
The Standard Life Investments Global Unconstrained Fund does as it might suggest invest on a global basis, looking to find the very best companies available.
I think the Skandia Global Best Ideas Fund fits into my next selection quite well. The money is allocated to 10 of the best fund managers in the industry and they are asked to produce their 10 best ideas. All these fund managers bar one are on our own Wealth 150 at the moment so I feel you are getting the best talents to run your pension fund by buying this fund.
My final choice is the Artemis Capital fund, which is largely a UK fund although some money is also invested in European stocks. These are by and large the larger companies rather than the more volatile smaller companies and it gives your pension fund access to the larger cap offerings in the UK.
There is a feeling of unease among investors across the globe. The likelihood of a US recession is spooking markets, which have been volatile for the past few months, giving investors cause for concern and prompting many to reflect on their investment strategy.
A major question facing corporate intermediaries is how how much insulation should advisers and providers put into company pension plans? And should they do more to help employees make informed decisions on how to react to market volatility?
“The problem with money purchase schemes, whether they are trust-based or not, is that few employees actually understand them. In fact their level of ignorance on pensions is enormous,” says Mark Dampier at Hargreaves Lansdown. “This should not be a surprise bearing in mind the level of financial education in this country.”
Dampier cites the example of a recent pension seminar, where halfway through his talk he was asked by a 35-year old woman what an equity was. “This type of question gives you an idea of the problem. Most employees are not interested in their pension plan. It is too complicated, with loads of paperwork, and most pick the default fund anyway – usually the poorest choice.”
Andrew Merricks at Brighton based Skerritts Consultants reckons that the extent to which the adviser is involved with individual scheme members is largely down to the employer. “In my experience employers are happy to set a scheme up to cause as little hassle as possible. In these cases the sensible approach is to use a default fund for members, perhaps allowing interested individuals (of which there sadly appear to be few) to discuss a more personal approach to their pension planning.
He adds: “Some employers however are happy to arrange surgeries for their employees, and at these it is more feasible to advise on unique investment strategies for members. Even here though, I find that I’m more likely to be approached by someone in a company scheme who has received correspondence relating to their scheme, and wants advice from their own IFA about how to react to it.”
One of the biggest problems facing group pension scheme members is often the lack of availability of advice on investment options. Advisers and employees are caught between regulation, a need to educate and covering their own liabilities. Many employers don’t want to advise in any way simply because they feel that this puts a huge liability on them.
“Employers are not allowed to provide this advice and often the scheme advisers would not provide it anyway – so access largely depends on what is factored in to the scheme charges and fees,” says Lee Smythe at Killik & Co. “It is difficult to get an external adviser to provide this advice unless you are prepared to pay a fee for it (as no commission would be paid to them) or if the adviser is doing other things for you and agrees to cover the group pension investments as well.”
Advisers reckon that an increase in communication when investment markets are problematic would have little effect, and could end up being counter-productive. Few members even bother to review their annual statement. “I don’t think that there should be any special communication because of falling investment markets, but continual communication about the need to review their pension contribution, forecasted pension fund and ensuring that they have the appropriate asset allocation for the term and risk profile are important,” says Michelle Cracknell at Skandia.
Lifestyling has long been the answer to protecting those nearing retirement from market volatility. It is an issue that has once again been thrust to the fore because from 2012 all UK employers that plan to automatically enrol their workforce into an existing defined contribution scheme will have to offer a lifestyle default fund.
Lucien Carton, the Amsterdam-based global product specialist for lifecycle and structured solutions at ABN AMRO Asset Management, not surprisingly reckons that they have a role to play, in particular those offering capital protection and the lock-in of investment gains.
“The latest generation of lifecycle funds may hold a solution for investors’ problems. These funds not only offer the lifecycle mechanism, but also full capital protection and – sometimes – the lock-in of investment gains,” he says.
“Products such as these present a potential solution for those looking to protect their capital and meet their long-term savings plans. They could also be appropriate for investors who may be too impulsive; those who are too hasty in their equity market decisions and prone to short-term investment decisions when markets plummet or soar. These investors are protected from making decisions that can have potentially dire long-term consequences.”
Others are not as convinced about the merits of lifestyling. Some reckon that they do provide an element of risk reduction for those that do not have access to advice, but that they are unsuitable for those that go to an adviser. What’s more, it is not simply the case of having a lifestyle fund – it is the underlying assets that are key.
DC Link questions whether the average lifestyle option – consisting of three funds; equity, gilts and cash – is an appropriate portfolio for long term growth or just playing safe. Only a handful of schemes with the lifestyle option offer more than one equity and one gilt fund within the default; the majority of schemes have a standard offering of one balanced managed equity, one gilt and one cash fund. Just 2 per cent of lifestyle schemes offer a genuine choice of investments to account for differing attitudes to risk.
Conventional wisdom says that, as people grow older their pension fund should move into lower risk assets to protect the value of their pots. In other words, funds should have less exposure to equities and a higher exposure to fixed interest investments.
But times are changing. People are living longer, with many likely to work past the formal retirement age. Indeed, turning on the income tap may not necessarily be such a high priority for many in their early-50s. Even in the early 50s, there may still be a need to accrue capital. If people are still working, whether full or part time, it shouldn’t be necessary to generate maximum income from their portfolio, because if they take income unnecessarily it can have a detrimental effect on its value.
“Lifestyling is commendable stuff if you actually retire and secure your pension by an annuity purchase at a set date pre-determined potentially 40 years beforehand,” says Smythe.
“Otherwise, if you retire earlier, or later, the lifestyling will not have served its purpose. This is particularly the case if you have accrued a reasonably sized pension pot and you wish to take advantage of some of the more flexible retirement options – such as Unsecured Pension (USP) – where you may wish to maintain an invested fund and drawdown income for perhaps another 15-20 years. If prior to this you have been lifestyled in to fixed interest and cash you will probably end up having to reinvest in to the very type of funds you have been moved out of.”
With such employee apathy, asset allocation and the choice of funds available to employees are going to be ever more important. Many believe that as the comfort blanket of defined benefit pensions is pulled back increasing numbers of employees will become sensitive to downside market risk.
“The impact of market volatility – or indeed another protracted bear market – on employees’ confidence in their pension provision could therefore be far more acute than it has been during previous market downturns. It is vital that the asset management sector finds a core investment option that is more closely aligned with the needs and expectations of members than traditional ‘relative return’ investment options that have been inherited from the defined benefit market,” says Peter Ball, head of UK investment at JP Morgan AM.
The consensus is that advisers and providers should provide a suitable range of funds, both in terms of number of fund options and differing risk profiles, so that members can select a suitable investment strategy, taking into account the term of the investment and members’ tolerance for risk. This needs to take into account the profile of the members – too many funds can be off-putting and confuse the members. There also needs to be a suitable default fund option.
“Members needs to think about the appropriate asset allocation to suit the investment term and their tolerance for risk,” says Cracknell. “For example, a member is 25 years from retirement. He says he has a very low tolerance to risk. If he invests all of his money in a cash fund that returns just above inflation, at retirement his fund may be £105,000. Going for such a very low risk strategy over a reasonably long period is likely to mean that the member’s fund will not grow sufficiently. At the other end of the spectrum, if he invested in equities his fund at retirement may be £195,000 – almost double the return.”
Cracknell suggests that the right answer for this member is probably an asset allocation split between equities and fixed interest from between 80/20 to 50/50, depending on his attitude to risk now that he understands better the implications. “There is more gained from correct asset allocation than trying to pick prize-winning funds.” she says.
Jason Walker at AWD Chase de Vere also reckons that asset allocation is the only way to address market jitters concerns. “There is no way you can predict or react – it’s more about asset allocation. Alternatives include traded life funds, absolute return funds – being uncorrelated is the key.”
Traded life policies are huge in the US and is an asset class that promises a return that is uncorrelated to both equities and fixed income, while the new range of multi-asset cautious funds are getting attention in the UK. UCITs III and changes to non-UCIT retail funds rules has altered the landscape and given fund groups greater powers with their asset choice. It has given managers the opportunity to add funds of hedge funds and private equity to the mix of their cautious managed funds.
Investment markets can be volatile but historically, they have always tended to rise over time. “The amount of risk a scheme member should take depends heavily on how much time they have until they need to call on their pension fund. The more time they have, the greater the opportunity to ‘ride out’ any falls in the value of their chosen investment funds,” says Ball. “As a rule of thumb, anyone who has more than 10 years before they need to call on their pension pot can afford to take a relatively high level of risk. Anyone with less than five years should take far less risk.”
Ball also points out that market volatility has a bright side because when stock markets fall, an investor is able to buy more shares with their money – giving them a bigger pot from which to benefit when markets rise.
“When markets are volatile, regular monthly investors can even benefit from a phenomenon known as ‘pound-cost averaging’. This means their monthly investment buys more shares or fund units when prices fall, and fewer when prices rise, which means the average price they pay per share is lower than the actual average share price over the period they invest,” he adds. n
Jason Walker at AWD Chase de Vere also reckons
that asset allocation is the only way to address market
jitters concerns. “There is no way you can predict or
react – it’s more about asset allocation. Alternatives
include traded life funds, absolute return funds – being
uncorrelated is the key.”
Traded life policies are huge in the US and is an asset
class that promises a return that is uncorrelated to both
equities and fixed income, while the new range of multiasset
cautious funds are getting attention in the UK. UCITs III and changes to non-UCIT retail funds rules has altered the landscape and given fund groups greater powers with their asset choice. It has given managers the opportunity to add funds of hedge funds and private equity to the mix of their cautious managed funds.
Investment markets can be volatile but historically,
they have always tended to rise over time. “The amount
of risk a scheme member should take depends heavily
on how much time they have until they need to call on
their pension fund. The more time they have, the greater
the opportunity to ‘ride out’ any falls in the value of
their chosen investment funds,” says Ball. “As a rule of
thumb, anyone who has more than 10 years before they
need to call on their pension pot can afford to take a relatively high level of risk. Anyone with less than five
years should take far less risk.”
Ball also points out that market volatility has a bright
side because when stock markets fall, an investor is able
to buy more shares with their money – giving them a
bigger pot from which to benefit when markets rise.
“When markets are volatile, regular monthly investors can even benefit from a phenomenon known as ‘pound-cost averaging’. This means their monthly investment buys more shares or fund units when prices fall, and fewer when prices rise, which means the average price they pay per share is lower than the actual average share price over the period they invest,” he adds.
OPINION: PORTFOLIO FOR 10 YEARS OR LESS TO RETIREMENT
While 10 years before retirement is still a relatively long time in the investment markets if you do intend to buy an annuity at the end of the period you do need to be far more vigilant on your portfolio.
The Standard Life Dynamic Distribution Fund is a fettered fund of funds. In other words it uses other Standard Life funds. This in my view is one of the most improved groups in terms of investment performance over the last few years. This is illustrated by the fact that the Dynamic Distribution is the number one fund in its sector over the last year. The fund invests in a mixture of bonds equities and property with the aim of giving relatively low volatility but with an income of approximately 4 per cent.
M&G Global Leaders on the other hand is a full-blown international equity fund. The investment approach is very much looking for the best stocks rather than necessarily the best regions.
The Midas Balanced Income Fund has an investment strategy to create a balanced portfolio of assets with both market and non-market correlation along with a focus on reducing volatility risk and achieving real returns. The fund is invested across UK equities overseas equities government bonds property and other alternative investments.
Finally my choice of PSigma Income under one of the most experienced fund managers in the UK, Dr Bill Mott will be no surprise to those who know of Dr Mott’s excellent record at running these types of funds at Credit Suisse. The fund invests almost exclusively in the UK market looking for shares on a high yield that are out of favour.
Portfolio split
Standard Life Dynamic 30% Midas Balance Income 20% Psigma Income 20% M&G Global Leaders 30%
opinion Mark Dampier, head of research at Hargreaves Lansdown.
PORTFOLIO FOR 20-30 YEARS TO RETIREMENT
This portfolio has been put together on the basis of a time horizon of around 20 to 30 years plus. Given this length of time it seems only right to have a global emerging markets fund in this portfolio. The industrialisation and growth of areas such as India, China and Eastern Europe are having a big effect on the world economy.
The Aberdeen fund run by Hugh Young has been one of the market leaders for many years. The Aberdeen team look for high quality businesses with talented management priced at a level that undervalues its potential. Emerging markets are undoubtedly a high risk and volatile area given a team of 19 based in London and Singapore I believe you are in the hands of some extremely experienced professionals.
The Standard Life Investments Global Unconstrained Fund does as it might suggest invest on a global basis, looking to find the very best companies available.
I think the Skandia Global Best Ideas Fund fits into my next selection quite well. The money is allocated to 10 of the best fund managers in the industry and they are asked to produce their 10 best ideas. All these fund managers bar one are on our own Wealth 150 at the moment so I feel you are getting the best talents to run your pension fund by buying this fund.
My final choice is the Artemis Capital fund, which is largely a UK fund although some money is also invested in European stocks. These are by and large the larger companies rather than the more volatile smaller companies and it gives your pension fund access to the larger cap offerings in the UK.
