Investing for drawdown – How L&G are responding to the challenge

Drawdown

Nigel Wilson, L&G’s CEO- recently ran a hang-out to discuss key issues. My question to him, was a bit technical and I’m glad that easier questions were put on the day!

I asked what solutions L&G could come up with to help people’s drawdown money go further and put up as a straw man, a type of investment often used in drawdown, a pure investment in the FTSE all share index,

Adrian Boulding, Pensions Strategy Director at Legal & General, has written the following response to my question (which I illustrated with Ned Cazelet’s graph below)

how-long-will-your-pension-last

Here’s what he had to say

We’re very excited by drawdown, and the idea that by investing in a fund with real growth assets a customer in retirement has the chance to access some rather higher investment returns than are available from the uber-safe assets that the regulator requires to be underlying an annuity purchase.

Having said that, the point that Ned Cazalet and a number of advisers are making, is that the sequence of returns is important, and that if you draw down on assets whilst markets are depressed you may run down the funds irreparably.

We try and counter this in two ways with our Retirement Income Multi-Asset fund, which we regard as a suitable drawdown fund for many customers with funds at retirement of say £50,000 and upwards. Firstly by diversifying the fund across many different asset classes we hope to invest to invest in markets that are not all correlated, so that a bad year in one market doesn’t mean a bad year for the whole fund. It’s a young fund so far, but the experience to date is that the volatility is visibly lower than a pure equity index fund.
Secondly, the fund manager operates the asset mix knowing that it is the basis for drawdown for many customers. So he doesn’t sell assets that have fallen in value but holds on to them waiting for the recovery. The income the fund generates can be either a natural dividend income or come from asset sales, and we are quite agnostic between these two, but subject to the golden rule of not selling depressed assets in drawdown that the fund manager is a firm believer in.

So we believe drawdown can suit customers well from retirement through to perhaps an age of 75, 80 or 85.

I’m in agreement with Adrian so far, it is essential that fund managers manage for their customers needs and I invest in this multi-asset fund for precisely the reasons Adrian articulates.

The mismatch between how L&G would invest assets in an unconstrained way and how they have to invest annuity money to meet the Regulator’s demands shows why annuity guarantees cost so much.

I also agree with Adrian when he accepts that a fund management solution cannot

What it can’t do is to resolve the huge uncertainty of the number of years of later life retirement that some individuals will enjoy whilst others will not.

That is an insurance problem that needs an insurance solution. At present the only solution in the retail market is an annuity, and these may prove popular purchases for customers in the age range 75 to 85 who have enjoyed drawdown that far.

Maybe other products will emerge. It’s too early to say whether they will, but it may be worth noting that in the institutional space, it is possible to buy pure longevity insurance today, and we have supplied this to a number of trustees for their group pension schemes.

Of course there are more ways to solve longevity problems than to purchase an insurance policy (which is what L&G sell).

Many of us will rely on our children or an extended family for protection against infirmity. Many financial systems, including our basic state pension rely on pooling of risk with the pool providing protection.

But there is understandable concern that reliance on risk pooling (where risk is pooled across a generation) or risk sharing (where risks are shared between generations) are unreliable and could lead to people going short.

In my world, there is a halfway house between people relying on something to turn up and purchasing guarantees from insurance companies.

Building such a halfway house, perhaps with some of the skills and products Adrian advertises , will be one of the great challenges of the next five years.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Investing for drawdown – How L&G are responding to the challenge

  1. Steve Beetle says:

    Why not go for a Vanguard FTSE 350 High Yield tracker which generates circa 4% with reasonable prospect of dividend (and capital) growth? Cost circa 0.25%. Or a World wide high dividend tracker ETF? If you want to mix and match then can’t you do that yourself with cheap trackers and ETFs? Why pay high charges for professionals to most likely get it wrong when you can do it yourself with less cost, with a real prospect of doing better because you will watch it like a hawk and with less cost you have a head start?

  2. Steve is right, a number of high quality ETF’s at low cost are available. However I would go a couple stages further .

    1. Invest the ‘drawdown pot’ on the dips – after allocating a reserve fund in cash with the fund.
    2. Make sure only ETF’s are used as the underlying investments – to keep charges low.
    3. Only use ETF’s that produce an income – as a hedge against charges and fund dips.
    4. Asset allocate /re allocate between Cash/Equity/Fixed Interest at least yearly.

    With a number of the low cost Pension Freedom products the above is pretty straightforward.

    I think Ned’s chart is a simplistic, but probably how much of the advice industry would approach it, and get it completely wrong again!

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