Per Linnemann is asking whether target date funds might use his technology, the ‘iTDF,’ to create a seamless transition from pre-retirement savings to safe income during the first 20 years of retirement.
This blog asks whether he is right or whether what he has invented has a niche in the options available to the more sophisticated investor from his or her SIPP.
Who is Per?
Per U.K Linnemann, at the age of 30 became chief actuary of the Danish Insurance Supervisory Authority, appointed by Queen Margrethe II. That was in 1983
Since then he’s been working on innovating the retirement experience for Danish savers and nearly 40 years on he’s calling for the adoption of what he calls individual target dated funds -iTDFs that can fill the vacuum in product innovation in decumulation – not least in the underserved markets in Australia, UK and USA. Per correctly identifies the problem.
The Australian Government ‘s Treasury has pointed out that 29 years after the introduction of compulsory superannuation (pensions) the retirement phase of superannuation remains under-developed.
More than 40 million Americans have invested $1.8 trillion in Target-Date Funds (TDFs) which appeared in the 1990s . Yet, despite effort and experimentation by firms that offer TDFs, these funds-of-funds still are not designed to convert savings to retirement income.
In Denmark investment-based variable income payout annuities are common . But Per says these products have significant shortcomings. They imply that retirees must be wealthy enough to be able to tolerate consumption volatility or they must accept lower expected investment returns and a lower living standard as the price to pay for less volatility in retirement incomes.
We know the situation in the UK, where we have failed to see any meaningful product innovation in the 7 years since the announcement that “nobody will have to buy an annuity again”.
So what’s new Per?
Per’s innovation -. iTDFs are managed account solutions , which Per claims make decumulation and accumulation easy for the customer – combining the two phases seamlessly. According to Per
iTDFs offer dynamic investment strategies and capital efficient smoothing of retirement incomes for the 21st century with or without longevity income management. It is unique to iTDFs that the personalized dynamic life-cycle investment strategies and the smoothing mechanism work well together. The built-in drawdown and investment strategies are interconnected and coordinated by mathematical formulas and constitute a unified whole in an innovative way.
The algorithm-based product design fit into a digitalized and mass-customized world – allowing scalability, portability and low cost. iTDFs can be delivered as fully automated solutions.
Per has even written his own headline to announce the arrival of his innovation.
“REVIVAL OF THE LIFE AND PENSIONS INDUSTRY IN A WORLD WITHOUT (EXPENSIVE) GUARANTEES”
But Per’s innovation has been slow to take off – why?
Per’s been banging the same drum for four years but without general success.
There are reasons for this. Firstly, the product demands considerable financial sophistication from its users. Ordinary pensioners need not understand the various moving parts but they need to feed Per’s algorithm accurate information about their financial circumstances for it to work properly.
Secondly, pensioners in my experience choose either to hand over the management of their post retirement finances to advisers or to be paid an income from a fund. Self managed retirement income is not a mass market in the UK and those who are being forced down this route are showing little appetite for it.
Thirdly, the financial services industry is waking up to the possibility that they can pay pensions collectively without (expensive) guarantees, using the regulations which currently allow single employer CDC schemes but which look set to offer multi-employer CDCs and eventually “decumulation- only” CDC arrangements. These look a more manageable way of attracting and maintaining the mass market.
A product targeted at the self managed Sipp market?
For these three reasons, I don’t see Per’s innovation as right for the UK mass market, but I think it has value for those with self-managed Sipps with organisations such as AJ Bell . Pension Bee and Hargreaves Lansdowne, whose customers do not feel they need or want advice.
These customers may feel comfortable managing their post retirement risks from drawdown products and there are plenty of readers of this blog who are doing just that. But a proportion- I suspect a substantial proportion – of Sipp customers do not want to manage the nastiest hardest problem on their own but nor do they want to compromise their capacity to make their own financial decisions by purchasing an annuity or joining a collective product. A large amount of the money in Sipps – perhaps as much as £100bn, came from occupational DB schemes to provide transferees with freedoms they will be loathe to give up.
So my advice to Per is to speak to the managers of the Sipp platforms and get them to drive innovation for you. The power is in the hands of the distributors. The providers of TDFs in the UK, Legal & General and BlackRock in particular have relatively little presence on Sipp platforms. If those platforms demand of them your product, you have a better chance of getting action than in appealing to bloggers like me!