Very few people saving for retirement in a retirement fund, have clarity on their investment objectives and understand the primary risks to their eventual retirement income, not only the risks to their capital. The main risks that could have an impact on the income of members (and the purchasing power of this income) are interest rates, inflation and longevity.
In the traditional defined benefit (DB) funds, members have little say over these objectives and according to the rules of the fund, only focus on replacing an income in retirement. As a result of this clear investment objective, liability-driven investment (LDI) strategies have been effective in ensuring that members’ retirement objectives are met.
In the more modern defined contribution (DC) funds, members have the freedom to choose what they want to do with their retirement savings. Some members may still choose to replace an income in retirement, either using a risky living annuity or riskless life annuity, while others may decide to use their savings for another purpose and not focus on protecting their income, but their capital instead.
These different objectives force trustees of retirement funds to consider different investment strategies. Funds were faced with the challenge of making choices on behalf of members when it came to selecting default annuity strategies as they struggled to select one strategy when the default regulations were introduced in 2018.
In an ideal world, every member’s investment strategy should be based on their unique objectives. Advances in investment and administration technology allow for more customisation, but economies of scale and our herd mentality have historically driven the investment industry to certain norms on how investment strategies should look, and how their performance should be benchmarked.
Unfortunately, there is no right or wrong answer here to the perfect investment strategy that will suit every member in a DC retirement fund. We, as modern day advisors, have certain beliefs about what we feel is the most appropriate investment strategy to help members replace their income with little risk, i.e our belief about income protection investment strategies. Capital protection thinks up to retirement and income protection thinks through retirement to death. However, we recognise that the trustees of a fund represent their members’ retirement objectives and may therefore have different beliefs.
We encourage trustees to consider the different investment objectives that members may have carefully, and to ensure that the fund’s consultant has clarity on these. This may result in the fund having several investment strategies catering for those members who want to focus on the protection of their retirement income or capital.
– Petri Greeff
Head of Investment Advisory, RisCura