Newton Investment Management's series of DC columns continues with Gerald D Rehn of BNY Mellon forecasting innovation in the market
Since the UK's pension freedoms were introduced in 2015, retirees have increasingly chosen flexible retirement drawdown products over annuities, with growth of 11% per annum expected over the next 10 years, corresponding to an increase in drawdown product assets from approximately £110bn to £330bn by 20271.
Initially, investment managers focused on launching and promoting multi-asset income funds to meet investors' needs. These products are effectively blends of bonds, equities, real estate and other alternative income sources that can generally be bought and sold with daily liquidity. Though the blending of lower correlated assets tends to dampen volatility and risk of loss, the investor's capital is at risk. Therefore, while the products tend to generate higher rates of income over guaranteed products, they are really only suitable for retirees who have the financial net worth to accept losses of capital.
In line with this reality, in the past year we have seen a change in focus of product launches targeting this market. Recent fund launches have focused more on volatility and loss control than income. This is an interesting development as it shows that while investors may say they want income, the stability of capital within their account may actually be more important to ensuring their long-term commitment, with income goals ultimately being met through steady long-term capital gains. Similarly, we have seen some with-profits funds being used in this space as go-to in-retirement products, with retirees encashing units to cover income needs over time. ‘One-size' products will never ‘fit-all' - besides high variability of pot sizes and abilities to accept risk, retirees may also have their savings in different tax-treated vehicles - e.g. defined contribution schemes, defined benefit schemes, ISAs, bank accounts, home equity, etc. With all these variables to consider, what does the future hold?
First, skilled advisers in investment strategies, funds and tax laws will clearly be in demand!
Second, on the product side we believe the market is ripe for innovation. We believe we will see products that blend the more favourable aspects of investment funds - e.g. higher income, liquidity flexibility and wider investment universes - with insurance contracts - e.g. longevity protection and capital guarantees - within target date-type fund vehicles that attempt to best match cohorts of retirees' income needs over their lifespan. These retirees require capital gains to last their lifetime, high income to cover spending, longevity hedging to cover later years and actively implemented in a portfolio of underlying investments that best fits the age cohort. Such products are already imagined within investment firms and the question is ‘When?' not ‘If?'
Gerald D Rehn CFA2 is head of international product and strategy at BNY Mellon
1 Market Intelligence 2017: UK Defined Contribution and Retirement Income. Broadridge, 2017.
2 CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute
For Professional Clients only. Any views and opinions are those of the author, unless otherwise noted and is not investment advice. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. BNY Mellon Investment Management EMEA Limited and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation. Issued in UK by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. INV01255, exp 31 May 2018