Don’t let market volatility derail your pension planning

These are challenging times for financial advisers involved in retirement planning. While naturally anxious to ensure their clients are properly prepared for later life, they are facing huge challenges in actually persuading them to save into a pension.

Stan Russell, the Prudential’s business development manager for pensions, can understand why people may be reluctant to part with their cash. After all, they will have seen how the values of millions of retirement pots have been devastated in recent years for a variety of reasons.

“People are running scared because of the market volatility and that is making life extremely difficult for advisers,” he says. “You’ve got this issue whereby clients are frightened of doing anything and their advisers are worried about what investments to put them in.”

This general reticence can be attributed to what he terms ‘the perfect storm’ - the combination of clients already in retirement drawing out too much money, market volatility, and falling gilt yields, which results in a drop in future income. It’s a situation that came to light during last year’s five year reviews. For those approaching Retirement it is where to invest that will still give them exposure to real assets but also give them an element of protection should markets dip at the wrong time.

However, he is adamant that advisers need to make clients understand that sticking their money under the mattress or in savings accounts paying lacklustre interest levels is not a viable option when inflation is running at a higher level than it has done for several years.

“The situation is even worse for pensioners because Silver RPI has run at up to four per cent on average higher than the inflation that everyone else has faced over the last three years,” he says. “The net effect is that they’ll be losing money by not investing it in real assets and it’s important to get that message across.”

One trend that has come to the fore – particularly within the institutional arena and becoming much more prevalent in the individual pension world – has been a move away from single asset classes towards multi asset arrangements. It is an approach that has worked extremely well during the recent market volatility.

“The benefit of having exposure to different asset classes in a single fund, whether it’s bonds, equities, alternative assets or property, is that the chances of them all going pear shaped at the same time is much more limited,” says Mr Russell. “It’s better than having all your eggs in one basket.”

This diversification can be further enhanced by the use of smoothing for example in our Prufund range, where we declare Expected Growth Rates that clients can expect to receive and which normally apply on a day-to-day basis. In addition unit price adjustments are applied when the formula requires it to do so. This helps smooth out the peaks and troughs.