Lee Hollingworth, Retirement & DC Solutions Director, explores the future adequacy problem facing the UK DC system, and how an active approach to fixed income investing could help improve retirement outcomes.
Framing the challenge
The UK faces a pension adequacy issue: simply put, pension pots are going to be too small to meet the retirement needs of UK savers. This is especially true of workplace Defined Contribution (DC) schemes, where the auto-enrolment rates are set at a level unlikely to meet the needs of most savers.
In our view, there are only two solutions to this challenge: save more or invest to look to achieve higher net returns. The mandatory minimum rates are unlikely to be raised in the near future; therefore, in our view, greater attention should be paid towards looking to generate higher returns. However, to date deployment of potential solutions have been stymied by the low-cost environment. We believe this is likely to change.
Investment risks
The value of investments and any income from them may go down
as well as up and is not guaranteed. Investors may not get back
the amount invested.
Credit Risk: Should the issuer of a fixed income security become unable to make income or capital payments, or their rating is downgraded, the value of that investment will fall. Fixed income securities that have a lower credit rating can pay a higher level of income and have an increased risk of default.
Government & Public Securities Risk: The Fund can invest more than 35% of net assets in different Transferable Securities and Money Market Instruments issued or guaranteed by any EEA State, its local authorities, a third country or public international bodies of which one or more EEA States are members.
EPM Techniques: The Strategy may engage in EPM techniques including holdings of derivative instruments. Whilst intended to reduce risk, the use of these instruments may expose the Strategy to increased price volatility.
Exchange Rate Risk: Investing in assets denominated in a currency other than the base currency of the Strategy means the value of the investment can be affected by changes in exchange rates.
Leverage risk: The Fund employs leverage with the aim of increasing the Fund's returns or yield, however it also increases costs and its risk to capital. In adverse market conditions the Fund's losses can be magnified significantly.
Liquidity Risk: In difficult market conditions the value ofcertain strategies may be difficult to value and harder to sell, or sell at a fair price, resulting in unpredictable falls in the value of your holding.
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Strategy to
financial loss.
For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.
