When considering how best to provide benefits for the retirement phase, asset allocation, risk management and individual advice all play a role – but vary between pre-retirement and post-retirement, according to a panel of experts at the Fiduciary Investors Symposium held recently.
The main difference between investing in the pre-retirement and retirement phase is the shift from investing for growth, to investing for growth plus income, noted Nick White, director of portfolio construction research, Mercer. The other major shift is investing for a long-term horizon to investing for a long-term horizon with an unknown end based on an individual’s longevity, he added.
A secondary consideration for retirees is determining the aim of their retirement savings – is it providing an inflation or interest-rate-adjusted real income or preserving capital for inheritance purposes, Bhanu Singh, head of Asia-Pacific portfolio management, Dimensional Fund Advisors asked.
“If the problem is that you’re trying to provide an Inflation-adjusted, or inflation-protected, real income over 30 years in retirement, then design a strategy that solves that problem,” Singh said.
“The main differentiator from what we’re normally used to doing is, over time, shifting from growth assets to perhaps high quality fixed-income type assets. They are ‘safe assets’, or defensive assets. Well, they’re defensive if your objective is capital preservation.
“If you’re trying to provide income which is protected against interest rate changes and inflation changes, that is actually quite a volatile asset – that’s a very risky asset – so you have to determine what the right asset is.”
Creating a strategy based on generating income from dividend yields has its own risks, said Chris Nichols, head of multi-asset investment, Aberdeen Standard Investments.
“In a world of buybacks and capital returns to shareholders and amortised assets, really I fail to see the difference between building a portfolio of yield assets that could be expensive, if there is a tax structure that means some investors want and need… yield-bearing assets – and those who need total return with reasonable sequence of risk and a reasonable level of return,” he said.
Session chair Jacki Ellis, portfolio manager, retirement strategy, First State Super, also emphasised the centrality of members, which brings in the need for advisory solutions.
“Certainly, First State Super is very pro-advice and believe it can deliver a lot of value to retirees, particularly around the need to communicate risk and communicate that cash and very conservative options are less risky in a volatility sense, but in terms of what matters to retirees – their income and that being sustainable for life – then actually, perversely, they can be the riskiest options,” she said.
The challenge for the industry is that advice can be expensive and may not make sense for all retirees, which means that the industry needs to think about how to get to know clients and deliver the proper solutions, Ellis added.