InvestmentsAug 9 2021

Designing a retirement strategy for clients after the pandemic

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Designing a retirement strategy for clients after the pandemic

The economic fallout of the Covid-19 pandemic rumbles on, interest rates are at an all-time low, and inflation has risen above the Bank of England’s 2 per cent target. At the same time, clients’ personal and family circumstances may have changed as a result of the pandemic, perhaps forcing them to reassess their retirement aspirations.

In addition to those short-term considerations, the longer-term picture presents a suite of unprecedented range of challenges, with central bank policies such as quantitative easing have distorted asset prices, and arguably changed the risk profile of many asset classes. 

High valuations for both bonds and equities challenge traditional asset allocation calls, and impact the condition portfolios are in when they arrive at the decumulation stage.  

In such a world, it’s clear a ‘one-size-fits-all’ approach to decumulation will not suffice, and fresh thinking is needed from all involved.                                        

Every client is unique

No-one could have foreseen the impact of Covid-19 on the economy or on our day-to-day lives. Job and wage cuts may have pushed back or scuppered some people’s retirement plans, while others may have embraced a ‘phased’ approach to retirement after experiencing the flexibility of working from home, something which has changed both the experience and the financial aspects of working.

Any of these scenarios could have affected clients’ decumulation plans, making a review nescessary for all involved. 

During this review process, the uniqueness of each client’s circumstances becomes apparent.. Clients may have very similar circumstances might be similar, but it is extremely unlikely they will have the exact same date of birth, the same state benefits, the same size pension pot, the same lifestyle, and the same relationship status, let alone the same aspirations for themselves and any possible future beneficiaries. 

Taking a flexible approach

A client’s needs and objectives can change significantly throughout their life, including beyond retirement. Their goals might shift from travelling the world to preserving a legacy for loved ones, or they might develop a long-term care need in later life. Longer life expectancy for most clients presents these challenges in a new light. 

A decumulation strategy should be flexible enough to accommodate your client’s evolving requirements. A bespoke discretionary fund manager (DFM) will speak to the adviser and client on a regular basis to assess their current and future spending. They will look at whether the amount withdrawn last year was sufficient, or whether they ended up putting excess cash in a bank account. They will also look at how much is left in the pot and, if appropriate, suggest reducing spending the following year so as not to deplete the pot too quickly, with many clients spending far longer in retirement than has historically been the case. 

Decumulation strategies also need to adapt to the shifting market backdrop. As we have seen over the past 18 months, share prices, exchange rates and commodity prices can swing wildly from one day to the next. DFMs usually have a team of experts whose job is to monitor and react quickly to market movements, thereby minimising the impact of sudden losses on the client’s portfolio.

While investing for retirement is a  longer-term project, the ability of an investment manager to react to the shorter-term considerations is also important as clients near their retirement date. 

Mitigating the risks 

Although the stock market has largely recovered from the crash of March 2020, many people will have seen their pension values fall, at least temporarily. And the recovery hasn’t been without its setbacks, with investors seeing choppy swings up and down in the markets for much of last year, as both sentiment and fundamentals were impacted by the trajectory of the pandemic. 

In retirement, dips in the market can cause lasting damage to an investor’s portfolio. This is especially so in the early years of retirement, when falls in the market can result in portfolios being unable to meet lifestyle expectations over the long term.

The economic recovery is still uncertain, meaning clients could continue to see investment values move up and down over the coming months. A DFM will not only keep advisers abreast of what is happening in the market, but will also look for ways to mitigate risks in the context of the client’s individual risk profile, and the goals the client has for their own lifestyle. 

During the pandemic, we have seen clients taking a keen interest in how their portfolios work, based on the advice their adviser has given them, as a key element of our review meetings. Part of that discussion has focused on how we can split the portfolio into the client’s short-term goals and employ an investment strategy to meet those goals – for example, using fixed-term investments to match planned redemptions with income liabilities. This can avoid the need to sell down investments in an unstructured manner. 

A major challenge for those tasked with preparing portfolios for the decumulation phase is that people now tend to live much longer in retirement, and so either need a much bigger pot in retirement or to manage the income in a different way. This challenge has been compounded by historically low bond yields

Government bonds would once have formed a significant slug of the assets in decumulation, due to the reliability of the income, and the relatively low risk profile. 

Lower yields mean a different approach is needed.   

We can focus on using growth-oriented asset classes for the long term, seeking to offset investment risks like rising inflation and continued low interest rates, and helping the adviser and the client to continue to meet their goals and aspirations. The adviser then has time to focus on maintaining the quality of their advice to the client and optimising the client experience.

Antony Champion is head of intermediaries at Brewin Dolphin