Retirement is often – and rightly – understood as representing a change to the way a fund engages with its members as they get access to the money they’ve accumulated over their working life and look for advice and guidance on what to do with it.
But retirement could also require a sweeping rethink of how pension funds, both at home and away, invest their members’ money.
“What it ultimately gets to is objectives,” Jon Pliner, global chief investment officer of WTW, tells Retirement Magazine.
“How do you think about risk when you go from the accumulation phase and the ability to withstand some short-term drawdowns to the decumulation phase, where any large drawdown, and the need to pull capital out at the bottom, can have a permanent impact on the long-term viability of a fund?
“It then becomes a focus on, how do I both get the return that I need long-term, but truly manage those downside risks? And it comes down to, really, one of the key tenets of how you accumulate capital long-term – which is to not lose it in the short-term. You don’t have to have very high expected returns on an annual basis with lots of volatility to grow your capital on a stable basis.
“Think about where you’re getting returns, and ensure you have a fair amount in strong, stable cash flow, yielding investments within the portfolio that can help you achieve the objectives as a decumulation investor.”
Super funds’ embrace of private credit was in part motivated by a desire to get more income generating assets into their portfolios as a larger number of members transitioned into retirement at a time when traditional defensive assets were unattractive.
Pliner suggests pension funds around the world might increase their allocations to strong performing, high yielding investments – including sub investment grade credit – or other cash flow generating assets in the form of infrastructure, where some assets come with the added benefit of inflation protection.
“In Australia, you’ve seen strong growth and utilisation of infrastructure investments historically, but that isn’t necessarily the case across the globe,” he says.
“If I think about the US, there’s been a large push towards actually starting to utilise infrastructure investment, something that truly hasn’t been in many institutional investor portfolios in the past.
“And so, it’s about finding those types of investments that give you that stable return profile, whether it’s direct inflation linkage or just simply strong cash flow-yielding investments that can help buy that stability.”
But while many funds are focussing on cash flow-generating assets and downside protection, that only represents one way of looking at retirement investing, according to The Conexus Institute* research fellow Geoff Warren, who says that there’s a tendency for pension funds at home and away to model their strategies on what an individual would want in retirement, rather than what’s possible for an institution.
Even an individual’s need for income-generating assets is questionable, Warren says, because it encourages them not to draw down on their assets.
“And when you go into a super fund it’s not an individual – it’s a pooled investment. What dawned on us was, don’t you need liquid asset exposure in retirement? Because people are drawing down their funds. Well, is the pool in drawdown or not? And it doesn’t necessarily have to be – you could have a growing retirement pool if more members are coming in than going out. So it’s not a foregone conclusion.”
Illiquidity is only a problem if you can’t anticipate that you have to sell when you have to sell, Warren says.
“If it’s slow moving and predictable, it doesn’t really matter and you don’t need a whole lot of liquidity. I think a lot of the notions on this is that people have this dissonance of trying to think through the lens of an individual and not think through the lens of how you manage retirement savings with a lot of people.”
And while the use of portfolio insurance could become more widespread, Warren says it inevitably sees funds give up returns through the ‘bleed’ associated with having to keep shopping in the derivatives markets. Members could have 100 per cent equities and play their defence elsewhere – say, through an annuity (though it’s hard to walk past the behavioural benefits of investments that “smooth” the retirement experience).
“I think it’s playing to the feeling that members can’t stomach too much volatility,” Warren says.
*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Investment Magazine.