Pensions  

Tools of the trade

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Reform must not leave individuals behind

We are now six months into the era of pension freedoms. The flexibility to take some cash and then draw down the remainder looks to be generally popular but how are retirees and advisers dealing with the allocation of the funds to provide an income for life?

This is not a new issue because we have had people going into drawdown under the older rules for many years. The difference now is that the numbers will likely be much higher as flexi access becomes the potentially default approach where once most retirees simply swapped their pensions for an annuity. See the share price falls in the annuity providers for an indication of market sentiment on this point.

The risk here is not that retirees are buying Lamborghinis but instead that they may not know how to go about providing themselves with a lifetime income to meet their needs. The adviser community is not large enough to provide them all with initial and ongoing advice and many will not be willing or able to pay for advice.

Retirees may perceive annuities as poor value but some certainty of income, as well as capital control, is still high on the list of their needs.

Fund management groups are looking at this area with interest. A large new market will open up to those that can come up with products which meet retiree objectives. Traditional life companies and annuity providers will also be actively looking at new ideas.

There is no free lunch and any marketing material which talks about a guarantee or a targeted income needs to be looked at very carefully. Ultimately, a guaranteed income can only come from an annuity and the current rates of annuity are a good indication of how much such a guarantee costs. However, there are new or at least retooled ideas which will appeal to some retirees who do not want to self manage their own portfolio or to use an adviser on a fully engaged basis.

Multi Asset Funds

These are not new but are seen by some management groups as a potential solution, especially within DC pensions. As the name suggests, the manager will invest across all or most sectors and not just in equity and bonds. Therefore the approach will be similar but on a larger scale to that taken within an adviser’s model portfolio or by a DFM. The fund will often be large and costs moderate. The manager will be able to use natural income to cover drawdown rather than necessarily sell assets during a downturn, thereby potentially avoiding forced sales which could lead to a loss. Clearly the investment approach taken will not be bespoke to the client. Most of the major fund houses have funds in this area.

Multi Strategy Funds

These are similar to Multi Asset Funds but with the added ability to use traditional hedge fund methods to potentially add to performance. Again, not a new idea but they can use strategies to control volatility and target income which may appeal to investors. Any such controls or targets will be dependent on the skill of the management team and must not be seen as guarantees. Absolute return funds are in the same space as multi-strategy and have not always delivered the promised results. Aviva have launched several multi-strategy funds which have performed well in recent volatile markets.