In Focus: Retirement Income  

Why your clients' pensions are at risk

TS: The idea was that the money would create, in effect, a sovereign wealth fund that would invest in all the sort of inflation-proof type of investments that you see in institutional pension schemes. 

So this would include infrastructure, healthcare - everything we would need to rely on in later life - and would help make investing more tangible. 

You could also secure the liquidity premium, create a sovereign wealth fund to build our hospitals, wind farms and future energy.

The challenge is that you add £1.6bn to the existing pensions cheques the government is writing to existing pensioners and so you are pushing up a hill. 

FTA: Atlantic House uses derivatives and you have described the fund structure being ‘maths’. Can maths really help with long-term wealth preservation and creation?

TS: Yes, we’re using derivatives and it can feel impenetrable to some people but as long as you remove as much of the credit risk as you can in a portfolio, and use various swaps you can get an income stream that is paid back to the investor. 

For example, with the Defined Return Fund, it means you can achieve the long returns of equities even in a fund that is primarily invested in gilts.

You still obviously have equity risk from the global, liquid derivatives that generate the return on capital, but you get it in a much more predictable way and that ‘timing the market’ element has been removed. 

If you don’t take leverage and you remove credit risk, and you mitigate counterparty risk by spreading the risk across 13 or 14 counterparties, you can minimise the risk of something going wrong. 

It’s predictable, it’s maths and it is not subject to a fund manager having an existential crisis or delaying investing into something whereby they miss significant upside.

In every other environment, except another Great Depression where markets fall by more than 30 per cent and stay there for more than six years, this will provide approximately 7 per cent a year, net. 

FTA: What if you get to 55 or 60 and a six-year market fall does happen? How would this affect pensioners in terms of sequencing risk?

TS: Predictability of returns is important in both the accumulation and the decumulation stages. 

Investing is risky. But a fund manager needs to ensure that they are not taking undue risks with people’s capital. 

Consider someone using this fund to build a pension pot.

Now imagine they were on the point of retiring in May 2020 and seeing all the dividends being cut and volatility rising through the roof; providing the fund’s counterparties are robust and the money is sitting with the government in gilts, they would have seen the fund not just back to where it was, but up 6 per cent.