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We are looking at how to solve the post-retirement problem – we are mindful that member needs may change and we want to be on the front foot to deliver a great post-retirement solution for them.


Emma Matthews, Now Pensions


The challenge here is to distinguish between investment losses in retirement stage default funds and a lack of guidance, par- ticularly given the fact that DC providers are not meant to pro- vide advice, but members might not make the most informed decisions. This is also a problem that has been on the agenda of the PLSA, which in 2020 published a set of recommendations for DC decumulation to navigate this balance. Among others, it rec- ommended that schemes could be doing more to provide the right products for withdrawing cash and keeping members informed about the different options available.


Annuity headache Another challenge for the pre-retirement stage is that in most cases, members will convert their savings either into cash or annuities and with gilt prices falling they could be in for a bad surprise, warns retirement consultant Lane Clark & Peacock (LCP). The volatility in bond markets has wiped out more than a third of annuity values since December 2021, this could be disastrous for people looking to cash in right now so holding onto the annuity might be the better option. This could be a problem, not so much for master trusts but for members in legacy schemes following an annuity-targeted strategy, says Lydia Fearn, a principal at LCP. “It depends on what strategy members are invested in. We still have a lot of members who want to take out cash. “What we are finding is that there are some legacy arrange- ments which mean that members are still on an annuity-tar- geted strategy which invests in long-dated gilts to try and match annuity pricing in the market. If annuity prices go up, they go up, if they go down, they go down. It is doing what it is designed to do but if you have members who are in the later stage of an annuity-targeted strategy but have no intention of buying an annuity, they will see their assets drop considerably. This goes back to good communication and ensure members are in the right place,” she adds.


Investment tweaks At the same time, DC investors have a role to play and it would be a remiss to suggest that they are not responding to a rapidly changing market environment. Just like in DB land, interest and inflation risks are on the agenda of DC investors, as Cunliffe explains. “Earlier in the year, The People’s Pension acted pro-actively to reduce the interest rate sensitivity and credit risk of our bond allocation by reducing our allocation to gilts and sterling corporate bonds in favour of US treasuries. With market valuations much more attractive we feel that the outlook for investment returns over the long term is markedly better than at the start of the year and we expect markets to begin their recovery phase once the peak of the inflation and interest rate cycles are in sight.” Now Pensions’ Emma Matthews says that there is still value in the traditional transition from risk assets to fixed income, but that guidance matters. “For us at Now Pensions, it comes back to how we believe we can best support our members – taking risks to grow assets (over the long term) in excess of inflation in the early years, focussing on balancing the risks that drive different asset returns. Then gradually de-risking to be majority invested in the Retirement Countdown fund at the point a member reaches retirement.” But she also acknowledges that there is room for change. “We review our approach regularly, with a deep dive every three years. We are looking at how to solve the post-retire- ment problem – we are mindful that member needs may change and we want to be on the front foot to deliver a great post-retirement solution for them,” she adds. For Nest, diversification is an important element of the puzzle, even at the decumulation stage. “We developed the Guided Retirement fund to support our members who are over 60 and who want to start taking their money out of Nest while still benefiting from potential investment returns. “Because our aim is to provide these members with sustainable withdrawals until age 85, they can continue to benefit from the returns from illiquid invest- ment,” a spokesperson for Nest said.


November 2022 portfolio institutional roundtable: Defined contribution 29


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