It is now over three years since Standard Life launched its Sustainable Multi Asset Universal SLP solution as its main DC default offering. Callum Stewart, head of investment proposition, distribution, explains how it is helping meet the needs of today’s and tomorrow’s pension savers.
Why did Standard Life revamp its DC default solution?
The pensions landscape has changed significantly in recent years with the introduction of auto-enrolment, pension freedom rules and the switch from DB to DC provision. We wanted to offer a default solution that responded to these changes.
DC pensions will be the primary retirement savings for the vast majority of people working today, so there is a need for a flexible investment solution that delivers good outcomes to a wide group of savers.
Our Sustainable Multi Asset solution (SMA) was launched in December 2020 after two years’ development and research. It was designed to deliver at least a mid-level or ‘reasonable’ income in retirement for all members, aligned to the ‘moderate’ retirement living standards set out by PLSA.
This is an ambitious but achievable goal, that does not result in savers incurring too much risk in their retirement plans. SMAS is a multi-asset strategy which reduces allocations to higher risk growth assets as people near their stated retirement age.
SMA now has around £24bn AUM, and around 2m members, including 1.5m members who were actively transferred over from older defaults.
What makes this a ‘sustainable’ solution?
SMAS is underpinned by the core belief that responsible investment strategies will add value over the longer term. We believe that managing various environmental and social risks, and capturing associated investment opportunities, will improve financial outcomes for members.
This is delivered via three key levers. The first is exclusions; we don’t invest in every company, simply because it is part of a stock market index. Some companies won’t exist in future, or may look radically different, and there are particular sectors that may be more sensitive to these changes due to their ESG profile. As a result we don’t invest in companies that manufacture controversial weapons, those that violate the UN Global Compact, those involved in unconventional oil and gas exploration, or tobacco companies. This may have been a controversial stance a few years ago, but there is now a wider acceptance of the risk of investing in potential stranded assets.
The second lever is that we don’t weight our investment in companies solely based on stock market weighting or size. We don’t think this is necessarily the best guide for which companies will perform well over the longer term. Instead we are trying to target companies that have taken steps to reduce carbon emissions risk, have strong ESG governance credentials, and are themselves addressing emerging environmental or social risks. We think these companies are more likely to outperform peers in future. Within portfolios this exposure is typically achieved via ‘tilting’ mechanisms.
Finally we use our weight and influence to drive change in the companies we invest in through our stewardship programme.
Has Sustainable Multi Asset delivered on its key goals?
It has been a challenging investment environment over the past three years, but this has not stopped the Sustainable Multi Asset solution delivering for members. The default has delivered competitive returns. Crucially, it is also meeting its primary objective to deliver returns that will help members achieve at least a ‘moderate’ standard of living in retirement. Internally, this means we need to return CPI plus three and a half per cent, which has been achieved.
One of the challenges we’ve faced in recent years is rising inflation, but the strong investment performance means members are still on track to achieve these living standards, even with higher inflation taken into account.
This SMA solution has been key to Standard LIfe’s growth in recent years. We’ve enjoyed particularly strong growth in our workplace business over the last year and onboarded the largest own-trust to master trust scheme to come to the market. Having a dynamic and successful investment solution helped us secure this £1.6bn scheme.
How will this investment strategy adapt to future challenges?
The last few years have shown how rapidly investment conditions can change. No-one can accurately predict the future, but we have designed this strategy to be flexible, with ‘future-proofing’ built in.
If there are opportunities to evolve or improve outcomes for members, we can do this thanks to the flexible structure and design of SMA. For example, last month we implemented a ‘to and through’ investment approach, aligning SMA to the various investment pathways now offered at retirement, reducing transaction risks and costs for members targeting drawdown.
We will also be reviewing our ESG methodology in light of the FCA’s forthcoming Sustainability Disclosure Requirements (SDR) to ensure we continue to meet the highest standards across the industry.
Other issues on the horizon include the wider adoption of private assets. We remain confident that whatever the challenge our flexible and dynamic approach will ensure SMA continues to meet the ongoing needs
of members.