If you’re over 50 and have a pension, my column in today’s @ftweekend is for you. Martin’s plunged by 32% after an action his provider took without his specific approval. How can this be right? Thanks to @adam_walkom and @henryhtapper #lifestylinghttps://t.co/ZgSWqzCS1D
— Claer Barrett (@ClaerB) January 27, 2024
Claer Barrett’s column in this weekend’s FT is not so much about pensions as about the complacency that allowed millions of savers to lose up to a quarter of their savings in 2022 through the groupthink that is “lifestyle”.
This article should be read out at the PLSA’s investment conference. It should be in the in-tray of every CEO of a pension fund or funder, the comments should be digested by those who design and distribute workplace pensions. Here is one of over 100 within 12 hours of publication.
The bottom line here is about well-remunerated supposed experts blindly following textbook rules and “industry practice” while ignoring common sense.
Who can possibly think that buying into long duration bonds with rates at extreme historical lows is a “low risk” investment.
Of course I don’t blame the individual savers. They can’t be expected to think about this stuff, but they reasonably trust the “experts” to handle it for them.
To be honest I’m not totally sure how you handle this at mass scale with people’s retirement funds: you can’t just give those over to macro punting, but equally some basic limits of common sense should apply.
Case studies do apply
The “Martin” in Claer’s article found his pot fall in size from £200,000 to £134,000 over 2022, he was a victim of being invested in gilts and corporate bonds. I speak to hundreds of such people when explaining the performance of their funds. Here is BlackRock’s Flexi Life Path fund’s asset strategy, which I had to explain last week.
This is the default fund for a lot of Aegon’s workplace pension customers. There’s no cash allocation, savers are 50% or more invested in bonds for the last 10 years of their working lives but in midpoint of their actual lives. Savers when they draw cash have no hedge, it took zero currency risk and its high allocation to bonds has meant massive performance variations between young and older savers. In 2022, it took all the wrong bets and was one of the worst performing default funds in workplace pension-land.
I have taken this up with both Aegon and the fund managers – BlackRock. The IGC and Master Trust statements on the serious underperformance are anodyne – amounting to “one of those things”. I still don’t know why savers aren’t lifestyled to 25% cash, why all currency risk is hedged out and why it’s felt necessary to nudge investments into bonds from their late thirties.
I cannot explain this strategy to ordinary people, it makes no sense to them. They are as angry as I am , but most of them don’t read the FT – I wish they could.
People are on the other side of this
The comments of FT readers in support of Claer’s article are informed and supportive. Here are some examples.
I would urge you to get an FT subscription , if you have one to read this article and the comments and if you haven’t and want a free link – contact me on henry@agewage.com.
On the subject of me, I’m quoted railing against pension industry complacency that stops us combining our pots. I have written to Claer as currently I am quoted as a “veteran actuary”. This too has found its way into “comments”
The final word goes to this commentor
A sober lesson and credit to the individual for wanting his story raised. A few observations in this area. No-one cares as much about your pension as you do – so yes go and find out what is in your pension……but for many sorting out the pension is way down the list of things to do this weekend. Caveat emptor.
Lifestyling became largely irrelevant with Osborne’s pension reforms but no-one bothered to address it. And as noted in the article many more savers in their 50s and 60s will be worse off “for an action someone else has taken without their specific approval”.
I “liked” Claer Barrett’s response
I trust the misinformed “Buccaneer”
isn’t James Brydon, one of the FT crossword compilers?
Surely not!
I suspect one of the problems is the risk rating of funds into which pensions etc. can be invested. “Low risk” actually means high risk of performing worse than higher risk funds. I wonder how much of the public appreciates that.
The Lifestyle fiasco in 2022 was an accident waiting to happen. The United Kingdom’s credit rating was downgraded from prime ‘AAA’ in 2013 and then again in June 2016 (‘AA+’ to ‘AA’) and October 2020 (‘AA’ to ‘AA-‘). The UK was no longer one of the world’s ‘top 20’ sovereign debt issuers – we were relegated from the ‘Premier League’!
Why does this matter? Well, sovereign credit ratings are used by global investors to gauge the credit worthiness of a country and should impact on its borrowing costs (the yield on its debt), except in the UK it didn’t! Consider the position at the end of 2021 – long term UK gilt yields had ignored the rating downgrades over many years and fallen to 1%, equivalent to a wholly irrational real return of minus 2.5% (long term inflation expectations, as measured by the ‘inflation swap’ rate, were 3.5%.) Yes, we know the market had been distorted by Quantitative Easing (‘QE’) and the activity of DB pension schemes but by the beginning of 2022 the Bank of England was moving from QE to QT (‘Quantitative Tightening’) as interest rates started to rise. At the end of 2022, the long gilt yield had risen to 4%, with a real return of plus 0.5% – sanity was returning!
DC schemes shouldn’t have been slavishly adopting a lifestyle strategy designed for a ‘pre-2015’ world of compulsory annuitisation. They were effectively taking a pathway along a cliff-edge that was fundamentally unstable and likely to collapse at some point!