Managing retirement solutions– finding opportunities behind closed doors

Dominic Byrne |01-May-2020

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.



Whilst it’s something of a cliché to reach for a quote when writing a blog, I do think Lenin’s “there are decades where nothing happens; and there are weeks where decades happen” has really resonated over the past couple of months.  

As we all adapt to the new realities of working from home, fresh thinking has come to the fore to help us all navigate our new daily routines. This is also the case for our investment teams. 

Though lockdown has provided an opportunity to further improve the already rigorous debates and innovative techniques underpinning the analysis and forecast of economic trends, asset class behaviour and changing regulation, it has also prompted a revisiting of some long-standing pillars of our investment strategy for retirement solutions. 

While in the short-term unpredictability lies ahead for savers, as a result of the losses experienced from risky assets and the uncertainty over the economy, for many UK pension savers their decades-long time horizons offer some solace. 

This is no truer than for younger pension savers. Their ability to earn and save over their working lives, combined with the likely increases in their earning and saving ability over the coming years, will be a key factor in driving their retirement pot. Time is on their side and they have a greater ability to recoup losses, as pension pots are negatively impacted by falling markets. We advocate maintaining growth assets in the early accumulation phase, despite the recent underperformance, compared with more diversified and conservative strategies. 

Where opportunities lie 

Many attractive long-term investments can be found in private markets. Private equity and infrastructure, for example, provide longer-duration investment opportunities making their objectives well aligned to investors who are many years away from retiring. These investments will not be immune to the impact of COVID-19 but, historically, their valuations generally change to a lesser degree as compared to public markets, as these changes are realised with a one to two-quarter delay. 

The long-term growth and diversification benefits of well-managed alternative investments make their inclusion in the growth phase of defined contribution (DC) default strategies very attractive - alongside public market growth strategies. We remain committed to help UK savers access these investment opportunities in the future. 

Building blocks 

A well-structured framework to help build retirement solutions starts with the consideration of three key lifecycle risk factors: market, inflation and longevity risk (the risk of people outliving their retirement savings). 

The key consideration for retirement portfolios is not just predicting if inflation will increase or decrease in the near-term, but also quantifying if there is a reasonable probability that rising prices will have a negative impact. Similarly, identifying when this inflation risk is most damaging is also key. 

Our research shows that rising prices are more damaging as we approach retirement, because our future earnings have less power as a long-term hedge. When we begin introducing more diversification into a default investment strategy, investments that have inflation hedging or real return characteristics can play a key role. 

Market risk is back with a vengeance 

The period of volatility we are experiencing has re-affirmed the need for more conservative strategies as we approach retirement. This may include dynamic asset allocation strategies or conservative strategic asset allocation portfolios that can help manage risk during this phase. 

Understanding the characteristics of diversifying strategies in periods of financial market stress is critical and requires considerations around the liquidity of underlying holdings and the distribution of their returns. However, as retirement strategies are increasingly used to facilitate spending through retirement, inflation and longevity risk also need to be considered. When we get to this retirement phase, it is a matter of managing market risk as opposed to eliminating it entirely by converting all our savings to cash (which does a poor job of managing inflation and longevity risk). 

Alongside asset allocation considerations, the crisis has led to a greater focus on some of the more overlooked parts of managing retirement solutions. Governance, operations and investment oversight are critical, and deploying resource and focus to these areas really matters. Contributions need to be invested efficiently, portfolios rebalanced, and investment committees need to meet despite the disruptions we face. 

In addition to these long-standing practices, a “revolutionary” feature of our investment process (sticking with the Lenin theme) over recent years, is the consideration of sustainable factors. It’s been really encouraging to see that the integration of ESG considerations into our processes is now core to how we manage portfolios from risk assessment and research, through to implementation. 

To conclude 

This crisis and its impact on our investments will continue over the coming weeks and months, and many of their implications will affect investment strategy for decades to come. However, focusing on the key features of our retirement investment strategy detailed above and building more sustainable investment practices aims to help improve outcomes for our clients and, most importantly, all UK savers.   

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of May 2020 and may change as subsequent conditions vary.