Gilts: risk-assessment complacency

Pat38493

gm0 said:

Lifestyling was introduced to solve a problem - equity crashes close to DC annuity purchase.  Which it does.
Drawdown variants were added which are not as aggressive in moving but generate tax free cash at the required age.

I opted out of lifestyling switches to gilts (long ago).  This left me invested in equities running into the Covid slump and having to decide when my derisking/generation of tax free cash should occur.  But my pot, my decision etc.

Under the current system - we all need to take responsibility for our own choices of investment.  Even if that choice is to not think about it and accept a default.  Choice and consequence. Nobody is doing it for us.

When I joined my DC scheme long ago - I accepted the default which at the time was 100% UK FTSE All Share - low cost tracker.  Nobody would say that was an optimal choice or default fund now but passive global index tracking investing had yet to come into fashion.  It was changed later with fashion and regulation to something else.  And they added lifestyling when the industry moved to that guided by the regulator.

Within that context - i.e. reality - not an invented one of grievance based on misunderstanding - the clear area of deficiency is financial education around this.

More fundamentally though - it *does not* have to be this way with each person (outside the legacy DB public sector universe) responsible for their own investment management, drawdown arrangements etc.  Alternative national pooled private DC pension models are possible.  Which combine the "known inputs at the time for the employer" aspect of DC but put back death pooling and some sequence smoothing features.   And drive out investment management costs with scale.  And drive out a lot of complexity for the individual member. 

With the current system retreating to the margins for the internationally mobile and wealthy.  The advice gap disappears as the masses don't need it.  It has many advantages.  But won't happen.  Too hard.  Not politicially attractive to garner votes.

It's also on companies who should not be opting employees in to an annuity targeted lifestyle approach if only a minority of people should be in that.

leosayer

Bostonerimus1 said:

designengineerj said:

Unlike the 70s and 80s very few people will be buying annuities so that argument is woefully out of date. Most people will be going for drawdown. The pension companies have known this for 20 years but they have failed to update the risk-assessment that the effect an inevitable rise in interest rates would cause. Equities are known to be volatile but at least the risk is well publicised and they have the benefit that investors can benefit from a rebound if it arises. There was no such possibility when pensions were locked into 15 year gilts. That's mis-management of funds arising from companies too arrogant to revisit their risk assessments.

With annuity rates so much higher than for the past decade I imagine people will be looking at them again. IMO a hybrid solution that involves SP, annuity and some drawdown is the way to go.

15 years is too long a duration to be "safe" when approaching retirement...IMO. Even when I was many years from retirement I kept my bond fund average duration around 7 years to reduce interest rate risk. 

Agreed. I prefer to hold short-duration bonds funds which have under 5 years duration - tied to the time horizon when the funds will be used for drawdown.

Unfortunately my main DC pension provider LifeSight has no such offering. It's either long duration or annuity matching so I've had to use their cash fund instead an get my short term bond exposure via other pots.

booneruk

designengineerj said:

The pension companies have known this for 20 years ...

That's another bold claim. The pension freedoms (which allowed flexible drawdown) only came into force in 2016. See:https://www.moneysavingexpert.com/savings/pension-freedom/

You beat me to it! spot on indeed

gm0

@Pat38493 - Correct. Most by now should be offering a range of different options based on intentions.  And many do.  Lump sum, NRA annuity, Target date, Drawdown.

And given demographics in recent years of annuity and DC drawdown - full annuity purchase lifestyling by default seems excessive.   Derisked on growth assets too much and too early.

Ultimately they have to offer something as the fallback to vary away from for the don't know can't pick / won't pick group.

Perhaps some of us here would think that was Lifestyling switched ON and "drawdown focus" levels of derisking

- Some loss of returns from the longish period of transition occur but less than full annuity purchase variant

+ TFC is available if the decision is ultimately to take it and equity crash timing risk is reduced

+ Some protection (less) is still in place if an annuity is considered after all and the "annuity" option wasn't switched into in good time

There is no optimal for all intentions and with ability to change your mind and proof against ill timed sequence with no derisking loss of return option. It doesn't exist.

But defaults as backstops offered by trustees never have been about "optimal" they are about avoiding catastrophic failures.  A mediocre matchup for most members most of the time is a win.  And the demographics and investment and access patterns of the specific scheme members would (or should) influence how trustees are advised to act alongside broader trends.  We are mostly discussing updating the defaults for joiners after all.

dunstonh

 The pension companies have known this for 20 years but they have failed to update the risk-assessment that the effect an inevitable rise in interest rates would cause. 

Annuities were effectively compulsory for the vast majority until recently.  So, where are you getting this 20 years from?

Qyburn

Linton said:

A single life RPI linked annuity at 65 now pays 4.777%.

A like for like comparison to drawdown should really include 100% spouse (or other survivor) pension.