I’m pleased that Julius Pursail has commented on my post on lifestyling. He’s someone who cares a lot about member outcomes. He’s made it clear in Professional Pensions that he wants the trust he advises – Cushon – to do more than the lowest common denominator or a strategy of “minimum detriment”.
Here’s what he has to say….I’ve put my tuppence worth in red
There are two sources of cost that members bear inherent in Lifestyling.
The first is the potential forgone return that derives from members not being fully exposed to a high return asset class (equities) as derisking (into whatever lower risk asset mix the trustees have decided upon) takes effect in the run up to “expected” benefit vesting.
Trustees take these decisions based on complex trade offs around the range of possible returns for different cohorts of members and uncertainty around the timing and type of benefits the member is likely to take.
As Con Keating pithily observes, the size of this forgone return that materialises when benefits are taken, represents the cost the member has born for decisions the trustee has taken about risk.
I think of this as “opportunity cost” which can be measured by comparing the lifestyle outcome with the outcome from not lifestyling. Here is an example
Here the orange line represents the return for someone who had not been lifestyled and the green line the person whose fund had been totally de-risked of equities (the other lines are for those who are in between. You can see that for five years after the crash that followed the market peak at 2000, lifestyle would have produced better outcomes. But staying in a de-risked fund had an opportunity cost from around 2005.
You can see that the same pattern emerged in the 2008 crash, it wasn’t till 2014 that the lifestyle fund showed an opportunity cost.
By comparison , the impact of the pandemic on outcomes in 2020 was short lived and lifestyle only provided protection for a year.
There really is no telling when the market is in freefall, how long lifestyle protection is worth having but like any insurance, its value is in relieving the stress of the short term market calamity. How many of those who enjoyed lifestyle protection over these crashes , were aware of the job it did? Conversely, how many savers are currently still in bonds and failing to enjoy the current market rally?
Lifestyle is an insurance that few know they have purchased. The value of that insurance is hit and miss and its cost can be immense. Using this insurance when it isn’t needed is a waste of money and this is why the kind of interactive messaging that Cushon wants to employ is helpful.
The second cost to members flows from the cost of trading between asset classes. This is an area where providers can help to minimise costs and improve outcomes by unit matching wherever possible between different members, benefitting both the seller (the older DC member) and the buyer (the younger member, still buying equities).
It must be right that trustees understand the impact of both these sources of cost, by measuring ex post member outcomes in the way AgeWage has pioneered. Understanding how well decisions made by the trustee about risk have turned out can help review the ex ante decisions trustees have taken about the risks members bear.
This is about execution and it’s something that trustees should be able to control. We can see historically the operational cost of lifestyling by comparing similar strategies executed in different ways. It’s a bit like measuring the time it takes to change wheels in a formula 1 pitstop, every car goes through the same wheel change but some lose more time than others. You can’t guarantee winners and losers but you can see which tyre- change times get it right more often than not. Past performance should be a guide to future performance – especially if its judged over two or more cycles (see above).
Turning to the questions you raise in your subsequent post about Cushon’s ability to use technology to engage with members, the 60% App driven member engagement figure relates to schemes that have been launched direct onto Cushon tech (we are in the process of porting the old Salvus (now Cushon) MasterTrust onto our technology). By using straightforward behavioural techniques and push messaging, that figure has climbed rapidly to 80% after just a few months. This level of engagement offers transformational capacity to create well tailored lifestyle strategies for our members, based on their own risk preferences.
As I have said above and in the previous blog, Cushon’s approach is a good one, provided it doesn’t overwhelm the member and get them sending messages to spam. Here is the challenge- laid down by Richard Chilman as a comment on my initial blog.
The trouble with much of this is that life is quite unpredictable.
Many of those for whom life is more predictable have great difficulty knowing when they might retire and what that retirement might look like, especially if it is a few years away. When it comes to it, retirement is often a gradual process involving part time working.
However, for very many people, retirement is driven by unforeseen and unwelcome events. There are first the redundancies, with the uncertainty of what (if any) work can realistically be done afterwards. There are then the health issues which often stop or limit the work that people can do, and indeed the things they may be able to do after work. And then there are the family issues like separation or caring for others. All these are the practical things that drive “retirement” for many and their access to their pensions and state benefits.
At least for most people, it is difficult to see how personalisation can work with any reliability at all. It can’t change how money has been invested in the past. For the future, the small percentage of financially sophisticated and organised people may continually feed changes of personal circumstances to a pension provider. However, this is pure fantasy land as far as most of the “pension lumpen” are concerned. They don’t keep on top of a number of complex things in their lives and have little if any understanding of investment issues. They just understand cash.
It would be interesting to see any examples of the kind of nudge that Cushon have in mind. It would also be good to know whether Cushon’s nudge to their membership to think and invest green, extends to those in their fifties and sixties. “Lifestyle” can be interpreted in many ways, but for the lumpen it is most connected with the quality of life we can lead!