Last autumn’s market volatility turned glide paths on their heads. The damage to retirement readiness would have not been so deep if the industry had had a better understanding of how members planned to retire. This was one of several topics discussed at a Corporate Adviser round table held at the House of Lords last month.
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Investment approach
Delegates debated the unusual impact that the market turbulence of 2022 had had on default glide paths, with many providers’ investment strategies delivering worse performance for those investors in the run up to retirement than for younger savers in supposedly more volatile strategies. With high interest rates offering tempting returns, would it be wise for portfolios to move out of equities, given the storm clouds that remain over the stock market?
Iain McGowan, head of fund propositions at Scottish Widows argued it made sense to stick to one’s beliefs. He said: “Over the long term investors will be rewarded for risk for taking risk. So equities will outperform corporate bonds and cash in the long term. Opting for 4.5 per cent on cash for a short period might sound like a good outcome, but it’s not a long-term outcome. There’s always a danger in trying to time the market.”
Shorter gilts
McGowan argued that the challenge lies in ensuring that investors are invested appropriately. He said: “The challenge that the conditions in 2022 threw up, though, was that not everybody is invested in the right way for their expected pension income.
“If you’re invested in long-dated corporate bonds and they fell by, let’s say, a third, well that’s okay if you were going to buy an annuity that became commensurately cheaper as a consequence of that. The difficulty for a provider is to know why members are investing.”
McGowan said a response to the 2022 experience was to increase allocations to shorter-dated government bonds and reduce corporate bond exposure.
Jamie Jenkins, head of policy and communications at Royal London said: “What we saw in the latter half of last year with the bond and gilt market changes was that the basic premise that government gilts are risk free momentarily wobbled. I’m sure it will find its way into the course books of financial planning exams over time. But it is also a reminder of the conversation over whether there are longer term assets that are less liquid, that may cost more but may give good returns with less volatility.”
Growth play
Martin Parish, head of pension consulting at Aon Employee Benefits, argued that the investment approach for defined contribution (DC) schemes needs to change from a liability-focused approach to a pure growth play. He said: “The investment industry needs to change its thinking around their investment strategy and move away from a liability focus, which is a DB legacy and look at a pure growth play.”
He made the argument that to provide members with the most freedom and flexibility, the focus should be on fund value at the time they elect to receive benefits.
Parish said buying an annuity was becoming more of an in-retirement rather than at-retirement purchase and that the DC sector needs to shift its perspective and get away from its DB history, which places a liability focus on investments.
Private market focus
Reflecting on the kind of returns available in public markets, Parish pointed out that private markets can offer better returns. He used the FTSE index as an illustration, which has had lacklustre returns in the previous five years. He said: “My concern is, as a private investor, that the better returns are available from the private markets than the public markets.”
Parish also noted that income funds and global stock funds have lost money over the past year. He also added, “We’re going to see the real pure DC population reach a point where they’re making retirement decisions, whether the markets have recovered sufficiently by then, to compensate for the current loss they would be experiencing.”
Jesal Mistry, interim head of DC investment at LGIM discussed the difficulties involved in retirement planning and the issues that arise from the government’s flexibility. He said: “The issue with flexibility at retirement is that the government gave loads of flexibility and freedoms, which was fantastic. But it’s made it difficult to be able to create something that really meets the needs of individuals into retirement.”
Liability is a significant consideration, but it’s not only about matching income and assets, said Mistry. He said it’s critical to think about what a person might do in retirement and how they would access
their benefits.
He said: “If you purely focus on pot at retirement, then in the last year from retirement, you should be in cash because that’s the only way you’re not going to lose any money. But for someone with £150,000, who may access drawdown, their horizon at the age of 65 is still 30 years.
Mistry said: “There’s a liability in terms of what they’re going to do and how they’re going to access their benefits, not in the truest sense of an income and an asset and trying to match the two together but in a different way.”
Glacial change
Hymans Robertson partner Mike Ambery expressed concern about the industry’s sluggish rate of change, with short service refunds and the pensions dashboards programme as examples of this. Ambery drew attention to the fact that around 90 per cent of people default through everything, including their investments. This begs the question of whether the sector is making sufficient effort to include members and motivate them to take a keen interest in their assets.
He concurred that the sector must do more to promote change and stressed the need for behavioural modification, arguing that members need to be motivated to participate more in their retirement and investing plans. Ambery also emphasised the importance of regularly providing members with useful indicators, such as retirement planning tools.
Ambery called for rapid development in the investment sector and urges all parties to cooperate to find solutions and drive progress. He stressed the necessity of working together with the Treasury and other organisations to enact substantive change. He said, “We should have that sort of lightning pace of accelerated development, which we see in other industries to help drive that forward.”
Default hesitancy
Lydia Fearn, partner at LCP drew attention to the fact that some clients are expressing apprehension and anxiety about their investments, which shows a lack of faith in the default option and a need for information on available investment options.
Ambery agreed that defaulting outcomes and guiding behaviour through meaningful communication are important. Default mechanisms can guide people towards the right behaviour, rather than telling them what to do he argued. Ambery emphasised the importance of making communication and engagement more meaningful, especially through technology like apps that can nudge people towards making better retirement decisions.
He also highlighted the importance of avoiding a one-size-fits-all approach and instead offering personalised options for individuals to choose from. He said, “We’re in a society where consumer duty will kick in. You can’t tell people what to do, and we shouldn’t. We should be guiding and giving not a one size fits all but instead, small, medium, large, and extra-large. Let’s give different t-shirts out and then let people pick what’s right for them.”
Jenkins noted that the trend towards individualised retirement savings plans has resulted in a significant transfer of risk to individuals. With more responsibility placed on the individual to make important financial decisions, the stakes have never been higher.
Jenkins praised the success of auto-enrolment and savings phase as an effective default option for retirement savings. But he made clear that this strategy can only get people so far because they ultimately need to make important choices regarding how to manage their retirement savings. Unfortunately, he said, a lot of people lack access to expert financial counsel and must make these choices on their own.
Negative messaging
According to Jenkins, this lack of guidance and advice has led to a negative and warnings-based approach to retirement savings. Many conversations about retirement savings focus on the dangers of making the wrong decisions rather than offering actionable advice.
He said: “We’ve created a very negatively-orientated, warnings-based set of guidance. It’s all about the dangers of things that could go wrong. I can’t tell you where you should invest, I can only tell you that’s the wrong thing to do over the long term. It’s all in the negative.”
Jenkins noted that this approach can be unhelpful and discouraging for individuals who are trying to make informed decisions about their finances. He suggested offering more useful and actionable advice to help individuals make informed decisions about their retirement savings. Ultimately, this will help to ensure that individuals are equipped to manage their finances and make the best decisions for their future.
But Russell Wright, DC pensions consultant at Redington reminded those at the debate that when it comes to engagement, people’s attention span is limited. He said: “People haven’t got the attention span. Compare what people like to engage with, things like TikTok, versus a letter [about pensions] that comes through the door, which is really long, and is full of caveats, full of warnings.”
David Croker, head of pension consultancy at Mercer Marsh Benefits pointed to about dashboards and the possibility of new players entering the pension sector with the intention of combining individual pension accounts.
He said that given their success with apps and related technology, banks were well placed to succeed.
Wright expressed agreement with the idea that pension providers may not be the ones to provide the ultimate dashboard solution that members choose. He predicted that it will either be the already-active participants in the D2C retail financial services industry or fresh players.
He said: “I think it will be either those existing financial services providers who are already engaging with customers or someone completely left field who’s going to do a lot better than a kind of traditional financial services provider.”
Mistry agreed and added: “What you’ll get is start-ups, fintechs or even the providers delivering their own version of it. So you’ve got the connectivity to be able to deliver something.”