4 minute read
A call for open mindedness in asset class allocation
By Michael Robinson | Aegon UK
The DC market has been slow to innovate. Many in or near retirement have benefited from the security that having a DB underpin to their income provides. As a result, DC savings typically haven’t been used to provide a longterm stable income in retirement.
As the membership of DB schemes reduce and generations continue to roll on, we are heading towards the first generation of DC savers who don’t have a DB safety net and the need for innovation will become more pronounced.
As the ONS Wealth and Assets survey shows, pension pots form a large proportion of a household’s wealth and with many pension savers investing in their workplace default, providers have a key role to play in ensuring that savers are set up to make the best of their retirement.
Traditionally, low-cost passive market cap solutions in DC have made up much of the market and have historically performed well. However, when compared to DB, there is a lack of diversification of asset classes that most have used for many years to drive growth and reduce risk, at price points that should be achievable given the DC industry’s scale.
Looking beyond the traditional passive allocations, there are investment offerings available in the market that can be used to address the upcoming challenges facing UK savers.
So, what else is out there?
There are asset classes where an active manager who deeply understands the asset class is needed to give the best possible outcome. Asset classes such as asset backed securities (ABSs), high yield and emerging market debt and certain equity markets could gain from active management to add benefits beyond what can be achieved through passive building blocks. It’s not that a fully active approach is the solution, however there is value to be generated from having a dedicated team who can actively manage the portfolio in the right areas.
With the Mansion House statement, and the government’s modelling suggesting that there’s a space for private markets in savers’ portfolios, private assets should be contemplated. What should be said however is that private markets should be allocated to with caution. Not all private assets are alike, and so within each private asset class providers should consider the particular type of asset, as well as the ability of the asset manager to source the correct deals. There are many operational and liquidity challenges and so any allocation should be done with the right level of due diligence and careful consideration prior to investing, as well as having an exit plan. Private markets won’t be a silver bullet, but providers should be ensuring that members benefit from long-term allocations both in accumulation and decumulation, whilst not paying this away in asset management fees.
Decumulation challenges can be nuanced and difficult, however a key point is that savings will need to last longer through periods of potentially high future inflation. So being invested in growth assets for the longer term may be seen as a positive for savers. Strategies which allow savers to be diversified whilst still maintaining allocations to growth assets should be considered as the market moves into decumulation.
Summary
There will be a call for more innovation in the DC market as time progresses, but this doesn’t need to be overly complicated, so savers find it difficult to understand.
Reviewing asset class allocations outside of passive building blocks should ensure that savers across accumulation and decumulation can trust their retirement assets are being looked after in the best possible way.
For industry professionals only and shouldn’t be distributed to customers. Opinions are based on the outlook of the Aegon UK Investment Proposition team and shouldn’t be interpreted as recommendations or advice.
