It’s what asset allocators think goes on in people’s imagination. We wake up in the middle of the night wondering whether we should be 60; 40 , 20;80 of super diversified with a multiply split personality that has something for everyone and nothing for the someone who we really should be targeting – the person with a need for a replacement wage in later age.
I am almost as annoyed about asset managers charging 5 basis points for a spreadsheet that converts a data capture into an asset allocation as Aron Muralidhar. The technology isn’t hard, the asset allocation model could have fallen off the back of a lorry, Accountability for outcomes is an Excel on some long-neglected drive.
QDIA = Qualifying Default Investment Alternative
DoL = Department of Labour – US for DWP
P&I = Protection and Indemnity
Accountability
Who is accountable for giving away this slice of a saver’s return? Not it seems the savers but their bosses who can load up the AMC in return for the grateful blessing of staff who now benefit from
” a more precise asset allocation that is better aligned with each saver’s unique circumstances”.
The idea is you can dial up or down risk based on knowing whether your punter can afford to f*ck up. My personal favorite is the Trump, where you load up with risk and then load up with lawyers and then crowdfund your way out of trouble by appealing to your extended fanbase to keep you out of jail for fraud.
I’d have the asset managers who are selling this snake oil share a cell with good ole Donald.
Sucker bias
It seems that asset managers are biased to marketing to suckers who see personalised asset allocations as “managed portfolios on the cheap”. I guess the suckers have worked out that managed portfolios are just a more expensive way of selling personalised asset allocations.
There must be one born every minute (as we say over here)
Whatever happened to pensions?
As my good friend Mr Muralidhar reminds us, all this snake-oil doesn’t get me or you or any other punter anywhere nearer a pension, it is just a wealth dump at a future date like Moira Dingle dumping a carload of manure on Ruby Fox- Milligan’s doorstep (this may be lost on American readers)
For those of us who would have our fertilizer spread evenly across our pastures, there is another way. This other way involves people accepting that they may not be the same as everyone else but they are a lot better ganging up with everyone else to get what everyone accepts is the point of a pension – a wage for life paid with or without guarantees or increases for as long as it’s needed,
I write that final word as a sop to Arun whose SeLFIEs run out after a pre-determined number of years. This might appeal to those who enjoy a bet but it’s a tough one to lose.
If you want a rather better bet – try paying some voluntary NI payments
Why is the cost of paying voluntary NI contributions at older ages so ridiculously cheap relative to the expected benefit? Remember that at £900 to buy an extra year it will still be the a giveaway largely to the better off. It is scandalous.
— andrew young (@glesgabrighton) May 7, 2024
Or you can hang around this blog to hear our latest thinking on how Pension SuperHaven is going to turn all these cartloads of dosh to pensions.
They’ve been doing this in America for 25 years as an employer defence against class actions on workplace pension schemes. Every member gets a different portfolio, some will do well and some not so well but you won’t see a class action for poor performance as the members will all have had different performance.
I agree with you that it’s far better to have one collective investment strategy, thought through carefully, designed and executed well.
Adrian
I must admit Henry that, although I often agree with you, on this one I am thinking of all the poor people who have messaged me about their ‘lifestyle’ fund, which automatically switched them into ‘safe’ bonds in the few years before they reached the pension age chosen for them by their scheme. They lost 30% of their fund value and now cannot afford to live on the pension fund they expected to keep invested to deliver better returns over the next 20 or 30 years. They never had an intention to buy an annuity (level annuity does not suit them) but this ‘mass market’ approach was anything but suitable. I think the idea of some personal targeting is essential for pensions in DC nowadays. People in the early years of their career should have broad diversification of risk assets.
People into their 50s and 60s should be asked to answer questions each year or two such as:
1. Do you know when you intend to retire
2. Do you think you will want to keep money invested for the early years of your retirement
3. Do you definitely want to buy an annuity
4. What is your state of health like – estimate your likely number of years left
5. Do you have other pensions that offer guaranteed income on top of State Pension
– If they don’t know when they may retire, they should not be put on normal lifestyling
– If they may want to keep money invested, they should not be taken out of risk assets to the extent normal lifestyling would do
– If they don’t want to buy an annuity they should not be switched like normal lifestyling products would do
– If they are in poor health and have low life expectancy they may be better not taking much long-term risk
– If they have other guaranteed income, they should not be assumed to need to sell higher risk higher return assets
By asking these kinds of questions, the provider is making a proper effort to ensure suitability. If people don’t answer, then at least they have had the chance to have a pension fund that suits their own needs. Currently, nobody checks, it’s all done for members on an assumption that they will not stay invested and will buy an annuity, so they are put into low-return assets over several years, instead of being offered the chance to make higher returns, albeit with risk.
The DC pension fund should not target more than 25% cash or more liquid low volatility assets unless the provider knows when the member is intending to stop work and/or when they want to withdraw money beyond their TFC, or indeed buy an annuity. If they do want an annuity, it may be safer to switch to gilts, but that still assumes that they buy a level annuity and don’t mind inflation risk. Otherwise, it would need to be inflation linked assets perhaps, not just fixed gilts?
The whole approach to ‘default’ DC provision should have been overhauled many years ago, as soon as pension freedoms were introduced. We are still waiting and still using the old style thinking that ignores individual circumstances. I don’t believe that is the right way forward and having some kind of personalised targetting is important.
All sensible stuff.
Pension Wise can help customers to plan ahead and think about whether their asset allocation suits their intent. Many think you are limited to one PW call but that’s not the case, so you could redo the call every few years.
If you have any DC funds (uncrystallised or in drawdown) and you’re under 50 (or any age if it’s an inherited pension or you are retiring on ill-health grounds) you’ll be eligible for a PW call. https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise/book-a-free-pension-wise-appointment/book-a-phone-appointment
Even if not eligible, the MoneyHelper helpline is available 0800 011 3797 to help with any and all UK pension queries.
Henry, Adrian – surely the point here is to look at what the TDF or the personalised approach is actually doing? What does good look like? I am predisposed to think that personalisation can offer better results than a TDF and that some form of personal LDI is a good thing. The analysis that Socius has done suggests that personalised strategies can offer betteroutcomes – as measured by the Sortino Ratio of the terminal value of the members pot. DS
David, Do you really mean personal LDI or are you really talking about CDI (cash flow driven investment)?