Henry Cobbe, managing director and head of research at Birthstar Funds, a provider of target-date funds, said that he is “deeply concerned” by the lack of awareness in the consumer press about the key retirement risks.
“We’ve seen articles promoting baskets of dividend paying shares as an alternative to an annuity which clearly they are not because of the capital risk involved.
“We’ve seen providers offering equity income funds with a high distribution yield as an alternative to annuities which is clearly not the case because again they are very high value at risk.”
He warned that consumers and advisers need to focus on retirement risks including shortfall, duration, longevity, currency as well as volatility.
“We think the industry needs to rethink the lexicon of risk. At the moment we are focusing on volatility along but its actually these retirement risks that at the moment most portfolios are not designed to withstand.
“They are trying to solve a different problem - they are trying to solve the problem of how to grow your pot whereas the problem in retirement is how to make your pot last.”
Mr Cobbe said that it would not be enough simply to rebrand multi-asset funds in light of the pension freedoms, but that they would need to be redesigned to be fit for this exact purpose.
The statements follow similar concerns highlighted to FTAdviser by Nick Samouilhan, multi-asset fund manager at Aviva Investors, who said a number of managers were simply repackaging funds that are designed for a different life stage that are not suited to retirement.
In comments featured in an FTAdviser guide to multi-asset funds in a pension, for which advisers can gain CPD minutes, Mr Samouilhan said: multi-asset ‘legacy’ funds are not designed to meet the new needs of clients who no longer have to use their pension cash to buy an annuity.
Stan Russell, senior business development manager for pensions at Prudential, agreed that using dividends and equity income funds as a direct comparison to annuities is not right because they are not “like for like”.
He added in terms of risks that there has been a move in the adviser market towards the effects of longevity and inflation but that it needs to be “pushed up the agenda a little bit”.
“I would add in legislation risk as well because we have had significant changes in legislation. There’s a chance that legislation and/or regulation can change again and advisers need to make clients aware that there’s not much they can do about these changes.”
Mr Russell also pointed out another risk - that of taxation - which he said needs to be moved up the agenda too. He added that deferred annuities are certainly one of the areas that companies are looking at to meet retirees’ needs.
“What somebody would have to trade off here is reduction in income with the guarantee that they will get an income for life at some stage in the future - and then you bring in mortality risk.”
Mr Cobbe cited target-date fund with a deferred annuity or ‘forward-start’ annuity was one of the most popular and effective products currently in the US.
Mark Fawcett, chief investment officer at the National Employment Savings Trusted, agreed that there is a range of retirement income risks that need to be managed.
“We agree there is a range of risks that retirement income products will need to manage, alongside volatility.
“The early consensus from our consultation process suggests that managing longevity risk will be a particular challenge that needs to be addressed in any solution designed for the vast majority of savers.”
ruth.gillbe@ft.com
