What does a good default investment strategy look like?
Most people saving into workplace pensions through auto-enrolment are in the provider’s default offering, so by their nature these defaults cover a broad range of employees. There is industry consensus on what a good default looks like: growth in the early years followed by a more diversified approach as members near retirement. But there is less consensus among master trust and GPP providers on the best way to deliver these over-arching aims.
Because of this wide range of approaches, trustees and employers should take a closer look at both the construction and investment strategy of their workplace default. The differences between providers may appear relatively subtle but they can have a significant impact on outcomes for members.
How does Aviva maximise returns for members during the growth and pre-retirement phase?
Whether savers are in our master trust or GPP proposition we seek to maximise growth during the early years, while offering a degree of protection in the run up to retirement.
During the early and middle years of a customer’s journey to retirement, Aviva’s My Future Focus solution has the majority of its assets in growth investments. The lion’s share of this is invested in equities, but we also have a 10 per cent allocation to illiquid investments such as commercial property.
We will shortly be allocating to further illiquid assets such as private debt and infrastructure, and over time, private equity such as venture capital. These all offer further diversification benefits as well as strong growth potential.
When savers get within 15 years of retirement we move towards a more diversified portfolio.
This still has a strong growth orientation, with exposure to high yield corporate bonds and emerging debt, alongside equities and illiquid growth investments but gradually increases allocation to more defensive assets as well.
Default solutions may look similar, in terms of high-level asset allocations and glidepaths, but the underlying investment strategies can be more complex and differ between providers.
For example Aviva also operates a dynamic asset allocation strategy on its My Future Focus default during the growth and retirement phase, with managers reviewing market conditions and making shorter-term tactical adjustments where necessary.
The tactical move to short-dated bonds in the wake of the 2022 gilt crisis, for example, helped reduce the impact of the resulting market movements on members’ assets.
Many defaults will adopt a ‘set and forget’ approach, rather than use these more dynamic strategies. But we believe these tactical adjustments, within appropriate guardrails, can help deliver better risk-adjusted returns for members.
How does Aviva approach the challenges around retirement?
Our investment strategy has to reflect our members and their retirement goals. We do a lot of research to understand what members want, and from this we know the vast majority remain unsure about how they will access their pension savings until they get very close to retirement.
This insight has informed our default strategy during the pre-retirement phase. We have designed a default that allows members to keep their options open as they approach retirement, rather than optimising the investment strategy for either drawdown, encashment or annuity purchase.
To offer this balanced and more flexible approach we keep a 30 to 40 per cent allocation in growth assets, which will include but is not limited to equities. But around 60 per cent will be in more defensive assets to protect members’ savings as they approach and move into retirement.
How will the decumulation challenge change in future?
At the moment, this strategy of “keeping your options open” works for todays’ retirees.
Many of those retiring today have relatively small AE pots and will have other retirement funds to fall back on, which may include some DB provision. But this will change, with people’s DC pots increasingly becoming the main source of their retirement income.
At Aviva we want to help members with the challenges they might face in future around sustainable levels of drawdown and managing their money post retirement.
We want to help people solve this by effectively splitting their retirement into two distinct phases, a ‘flexible’ early phase, which will be funded through a drawdown arrangement, and then moving to a more secure income, typically around the age of 80 with an annuity purchase.
This will be offered post-retirement, with members supported by guidance around these options, and backed by Aviva’s robust investment strategy.