We at AgeWage aren’t concerning ourselves with theory, we busy ourselves with experience, studying the evidence of “what actually happened”.

In this study, we look at what actually happened to people’s savings as they approached retirement and we’re focusing on three periods of financial stress where savers have most to lose.

We use the data of real savers , use real charges and these results include the impact on people’s pots of the buying and selling of units as part of the lifestyling.

The past isn’t always a guide to the future but we shouldn’t dismiss “history as bunk”. For those who use lifestyle – there is often the choice to turn it off. For those who operate lifestyle as a scheme funder this information may help in design while for those who are trustees, this study should be essential reading as part of the value for money assessment.

Thanks to AgeWage’s COO- Rahul Agarwal – for this work

Effect of Life-styling

This paper analyses the effect of life-styling in the events of market shock. Life-styling is designed to protect the members against such events and the following scenarios show the extent to which the member benefit compared to someone without any lifestyling strategy.

The market shocks considered for the purpose of this analysis are for the periods of Oct 2002, Feb 2009 and Mar 2020. In each of these events, members at different stages of lifestyling are compared against members without lifestyling immediately after market shock and subsequently until 5 years after each market shock. Typically, a lifestyling strategy would switch from 90/10 (equity/bond) asset allocation to (50/50) asset allocation for 75% of the asset with remaining 25% in cash. For the sake of simplification, the strategy for this analysis is assumed to transition from 90/10 (FTSE All World/UK 10-year bond) to 40/60 (cash assumed to be bond) linearly in 5 years. The strategy is tabulated below, the equity strategy is classified as growth and the bond strategy as protection

For each market shock, 6 members are compared against each other. The status of each member at the time of market shock is shown below

Each member is assumed to have contributed for 10 years (with £500 of initial endowment, £100 contribution per month increasing at 5% annually) before the market shock. The IRR for the members is first calculated immediately after market shock. After that, the IRRs are calculated 1yr, 2yr, 3yr, and 5yr after-market shock to understand the recovery and the effect life-styling has made on the IRRs. For each market shock three scenarios are considered, one where members continue to make the contributions at the same rate (see above), other where members stop making contributions immediately after the market shock, and last where members start drawing down immediately after lifestyling ends at Normal Retirement Date (NRD) (£4000 lump sum and £80 per month henceforth)

Results

Market Shock: Oct 2002

In all the outlined scenarios, life-styling significantly protected the members immediately after the shock. However, the benefit is nullified within 3-5 years and the member A outperformed all the other members 5 years after the market shock irrespective of drawdown, level of contribution etc. Drawdown can impact the member without lifestyling most significantly if they choose to withdraw at the bottom of the market but with sufficient pot balance the scope of recovery is higher.

Figure 1 shows the members experience in terms of IRR before, during and after the 2002 market shock. The members are assumed to have started contributing to their pots since 1994 and the IRRs represented in the graph are cumulative IRR until that year. Leading up to the market shock, 1999 shows a peak in the returns while 2002 returns indicate the more lifestyling a member has been through, the better their returns are at that point.  However, as members continue to make contributions to their pots until they are completely life styled, the lifestyling advantage in 2002 is nullified over the next 3-5 years and member A ends up outperforming rest of the cohort.

Fig 1. Member IRR pre & post 2002 market shock (continued contribution until lifestyling ends)

Figure 2 shows the members experience in terms of IRR where the members are assumed to have stopped contributing to their pots at the event of market shock. Since the cheaper equity unit prices could not be taken advantage of with new contributions, the recovery is slower compared to Figure 1.

Fig 2. Member IRR pre & post 2002 market shock (no contribution after 2002)

Figure 3 shows the pot value of the members pre- and post-market shock. Member A had the lowest pot value in 2002 (£13k) and member F had the highest (£19.5k). However, by the end of 2007, member A had £9000 more than member F.

Fig 3. Member NAV pre & post 2002 market shock (no contribution after 2002)

Figure 4 shows the members experience where the members are assumed to have started drawing down (£4000 lump sum and £80 monthly) at the event of market shock. Member A with the least pot value would be impacted most severely. Due to high proportion of pot being withdrawn the recovery for member A is even smaller but it still manages to outperform rest of the cohort by 2007.

Fig 4. Member IRR pre & post 2002 market shock (Drawdown starting 2002)

Figure 5 shows the pot value of the members A and F. Member A had the lowest pot value in 2002 (£13k) and member F had the highest (£19.5k). However, by the end of 2007, member A had £800 more than member F. With continued market recovery, member A will be better off in the long term

Fig 5. Member NAV pre & post 2002 market shock (Drawdown starting 2002)

Market Shock: Feb 2009

The results from 2009 market shock follows similar pattern as the market shock of 2002. However, if the members stop contributing immediately after the shock, the recovery is slow for member A. With £4000 lump sum drawdown from a £10,000 pot, member A did not have significant pot balance to recover at a faster pace. Hence, it is prudent to cash out minimum amount of savings during the crash. In the scenario above, lifestyling has proved to be really effective for members in need of immediate case withdrawal. However, a different/no drawdown strategy warrants more investigation into the effectiveness of lifestyling on a member level.

Figure 6 shows the members experience in terms of IRR before, during and after the 2009 market shock. The members are assumed to have started contributing to their pots since 2000 and the IRRs represented in the graph are cumulative IRR until that year. Leading up to the market shock, 2007 shows a peak in the returns while 2009 returns indicate the more lifestyling a member has been through, the better their returns are at that point.  However, as members continue to make contributions to their pots until they are completely life styled, the lifestyling advantage in 2009 is nullified over the next 3-5 years and member A ends up outperforming rest of the cohort.

Fig 6. Member IRR pre & post 2009 market shock (continued contribution until lifestyling ends)

Figure 7 shows the members experience in terms of IRR where the members are assumed to have stopped contributing to their pots at the event of market shock. Since the cheaper equity unit prices could not be taken advantage of with new contributions, the recovery is slower compared to Figure 1.

Fig 7. Member IRR pre & post 2009 market shock (no contribution after 2009)

Figure 8 shows the pot value of the members pre- and post-market shock. Member A had the lowest pot value in 2009 (£10k) and member F had the highest (£19.7k). However, by the end of 2007, member A and member F had similar pot values (£25k)

Fig 8. Member NAV pre & post 2009 market shock (no contribution after 2009)

Figure 9 shows the members experience where the members are assumed to have started drawing down (£4000 lump sum and £80 monthly) at the event of market shock. Member A with the least pot value would be impacted most severely. Due to 40% of pot being withdrawn member A never recovers and ends up underperforming in the long run as well.

Fig 9. Member IRR pre & post 2009 market shock (Drawdown starting 2009)

Figure 10 shows the pot value of the members A and F. Member A had the lowest pot value in 2002 (£10k) and member F had the highest (£19.7k). Without enough remaining in the pot for recovery, member A ends up £7k less than member F in 2014. Hence, the withdrawal at market low needs to be exercised and monitored carefully.

Fig 10. Member NAV pre & post 2009 market shock (Drawdown starting 2009)

Market Shock: Mar 2020

In the 2020 shock, the market recovered so-quickly (within 1 year) that irrespective of further contribution, stages of lifestyling, and drawdown strategy member A outperformed other members significantly within 1 year. The underperformance created by the initial impact of the shock is easily nullified by significant overperformance in 1 year. Hence, lifestyling may not have been the most effective strategy for this market shock

Figure 11 shows the members experience in terms of IRR before, during and after the 2020 market shock. The members are assumed to have started contributing to their pots since 2011 and the IRRs represented in the graph are cumulative IRR until that year. 2020 returns indicate the more lifestyling a member has been through, the better their returns are at that point.  However, as members continue to make contributions to their pots until they are completely life styled, the lifestyling advantage in 2020 is nullified over the next year and member A ends up outperforming rest of the cohort.

Fig 11. Member IRR pre & post 2020 market shock (continued contribution until lifestyling ends)

Figure 12 shows the members experience in terms of IRR where the members are assumed to have stopped contributing to their pots at the event of market shock. Since the cheaper equity unit prices could not be taken advantage of with new contributions, the recovery is marginally slower compared to Figure 11.

Fig 12. Member IRR pre & post 2020 market shock (no contribution after 2020)

Figure 13 shows the pot value of the members pre- and post-market shock. Member A had the lowest pot value in 2020 (£16.5k) and member F had the highest (£18.5k). However, by 2021, member A had £8,000 more in pot value than member F.

Fig 13. Member NAV pre & post 2020 market shock (no contribution after 2020)

Figure 14 shows the members experience where the members are assumed to have started drawing down (£4000 lump sum and £80 monthly) at the event of market shock. Member A with the least pot value would be impacted most severely. Due to high proportion of pot being withdrawn the recovery for member A is hampered but it still manages to outperform majority of the cohort within 1 year.

Fig 14. Member IRR pre & post 2020 market shock (Drawdown starting 2020)

Figure 15 shows the pot value of the members A and F. Member A had the lowest pot value in 2002 (£16k) and member F had the highest (£18.5k). However, within 1 year, member A had £4,000 more than member F. With continued market recovery, member A will be better off in the long term

Fig 15. Member NAV pre & post 2020 market shock (Drawdown starting 2020)