What makes an appropriate investment solution?
When considering what makes an appropriate investment solution for each Option, the litmus test is its appropriateness to and alignment with the standardised objectives within that pathway.
Looking at Options 1 and 2 in turn:
Option 1: “I have no plans to touch my money in the next five years”
The standardised objectives for this pathway are clear. The client is planning to “stay invested”. They are not therefore in decumulation. So for clients in Option 1, there is no change to their investment strategy, and accumulation style portfolios (for a given risk profile), may continue to make sense. The primary consideration from a Retirement Pathways perspective is therefore the soft price cap of 0.75 per cent or below.
Examples of what we consider to be good practice funds being used by firms offering pathways to non-advised providers include:
- Single multi-asset index fund from the same range, aligned to a specific risk-return profile
- Single Target Date Fund from the same range, aligned to client’s expected retirement date
These are clearly “one size fits all solutions”, so for advisers, there is an opportunity to create a more nuanced model portfolio version with greater alignment to an adviser firm’s customer segments.
Option 2: I plan to set up a guaranteed income (annuity) within the next 5 years
This is a relatively straightforward liability-relative objective. The near-term future liability is an annuity purchase. The client is considering decumulation via the conversion of capital into a guaranteed income within the next five years. However the value of the annuity income received will fluctuate along with gilt yields. Gilt yields are so important for two reasons:
- Firstly, when insurers offer annuities, they need to invest the capital they receive from investors in something that is sure to provide an income each year over time. This is typically a mix of UK gilts and UK corporate bonds, both of whom are sensitive to changes in yield.
- Secondly, GAD rates. Whilst GAD rates are no longer compulsory, the methodology for creating a GAD rate provides a useful proxy for creating a sustainable retirement income. The bedrock of GAD rate estimates is the 15 year gilt yield.
So for investors looking to own a similar pool of assets to “hedge” their forthcoming annuity purchase (that is, whose value will increase if annuity rates decline), it makes sense for investors to own a portfolio of assets (that is, bonds of appropriate interest rate sensitivity or ‘duration’) similar to what insurers would hold to provide that annuity.
Examples of what we consider to be good practice funds being used by firms offering pathways to non-advised providers include:
- Single fund solution: short-term investment grade sterling bond index-tracking funds/ETFs
- Single fund solution: UK gilts tracker funds/ETFs
- Single fund solution: Specialist pre-retirement funds, similar to those used in workplace pensions
For advisers, there is an opportunity to create a more nuanced model portfolio version with greater control over yield and duration, but it would have to deliver better value for money than the above single fund solutions.
Summary
Retirement Pathways are designed to deliver better outcomes to non-advised investors. But they provide a helpful framework for advisers developing their own proposition too.
