Aviva Long Gilt S^ fund

alistairwhite27

Hi, I am no pension or investment expert but I'll to to explain...

I have a pension fund with Aviba based on a "lifestage" approach to investment./  Basically that means that, as iI approach retirement age, Aviva will "automatically" (their word) invest in less risky funds to protect my pension.  there is a bit more detail in the policy but that is the gist of it.

Over the past couple of years they have transferred money out of funds with a risk profile of 1 and 2 into the Long Gilts S6 fund which has a risk profile of 5 (out of 7) which has depreciated by about 40% over the last 2 years.

Is this not a direct contradiction of the lifestage approach we agreed?

I have complained to Aviva but they have fobbed me off with an explanation I dont understand and have declared the matter closed.

Has anyone else had similar experiences?

Alistair

masonic

Long gilts are a hedge against falling annuity rates because annuity rates rise when gilts fall (unsurprisingly because long gilts provide much of the income of an annuity). So such a fund will protect annuity income in the years leading up to retirement.

If this is the approach you agreed, then you have to accept that the flip side is missing out on the opportunity to benefit from rising annuity rates. However, many people no longer use their pension fund to purchase a lifetime annuity in retirement and this lifestyling approach wouldn't be appropriate for them. Arguably those using a drawdown strategy would be best sticking to the same asset allocation appropriate to their risk tolerance or move into an equity+bond income based portfolio, which would tend to use shorter duration bonds including corporate bonds.

There have been a number of threads on this subject from those who didn't understand this approach or its ramifications, so you are certainly not alone in being caught off guard by it. Though you may be the first to have been moved from money market funds to long gilts. The starting allocation would be harder to justify as appropriate for retirement savings.

dunstonh

Over the past couple of years they have transferred money out of funds with a risk profile of 1 and 2 into the Long Gilts S6 fund which has a risk profile of 5 (out of 7) which has depreciated by about 40% over the last 2 years.

Investments will generally act within an expected volatility range around 95% of the time.   The period of 2021 to Oct 2023 saw unprecedented falls in long term gilts.   You would have to go back over 100 years find anything close to being similar.

 Is this not a direct contradiction of the lifestage approach we agreed?

No.   That is because the things that caused gilts to drop so significantly in value are the same things that caused annuity rates to rise.    Effectively, the gilts fall is offset by the annuity rate rise and you are not any worse off.

e.g. if your value fell 20% then gilt rates rose 25%.   So, you get the same outcome. 

This is why gilts make a good option with lifestyling for annuity purchases.    It doesn't matter if you plan drawdown as you wouldn't use an annuity-targeted lifestyle strategy for drawdown.

I have complained to Aviva but they have fobbed me off with an explanation I dont understand and have declared the matter closed.

They wouldn't have fobbed you off.    However, they correctly rejected your complaint and closed it.

Has anyone else had similar experiences?

Anyone with gilts and bonds in their portfolio.

Hoenir

alistairwhite27 said:

Over the past couple of years they have transferred money out of funds with a risk profile of 1 and 2 into the Long Gilts S6 fund which has a risk profile of 5 (out of 7) which has depreciated by about 40% over the last 2 years.

Do you have a good understanding of how Gilts are priced ?  

JohnWinder

I'm with the Alistair at the moment, not quite satisfied with some of the explanations.

He's using lifestaging which as explained could be well suited to planned annuity buying. If he's not planning annuity buying then lifestaging might still be a good strategy as it reduces risk at a time when there's less opportunity to recover from risk related portfolio downturns. Were that the case, and he's been moved from an asset with less volatility to long bonds with lots of volatility potential, it seems a questionable move. And we don't need to have seen long bonds suffer a once in a century drop to know that long duration bonds could do that anyway.

But Alistair ought not panic yet. There will be a recovery of long gilt fund values as time passes; the issue is whether your investing time horizon matches the bond fund's at this stage. As time passes it certainly won't, as yours gets shorter but the fund's stays long.

dunstonh

 If he's not planning annuity buying then lifestaging might still be a good strategy as it reduces risk at a time when there's less opportunity to recover from risk related portfolio downturns.

There are different ways of doing it for different methods of draw.   He is in the annuity method.     

 Were that the case, and he's been moved from an asset with less volatility to long bonds with lots of volatility potential, it seems a questionable move.

But it was his choice.     If you go into a strategy that says it will move into long term gilts on a given date then they have to do it.   No ifs, no buts.   It's up to the investor or their adviser to change the strategy if the current one they are in is no longer suitable for their revised objectives.

And we don't need to have seen long bonds suffer a once in a century drop to know that long duration bonds could do that anyway.

Correct.  Which is why they are good for annuity lifestyling. 

Linton

JohnWinder said:

I'm with the Alistair at the moment, not quite satisfied with some of the explanations.

He's using lifestaging which as explained could be well suited to planned annuity buying. If he's not planning annuity buying then lifestaging might still be a good strategy as it reduces risk at a time when there's less opportunity to recover from risk related portfolio downturns. Were that the case, and he's been moved from an asset with less volatility to long bonds with lots of volatility potential, it seems a questionable move. And we don't need to have seen long bonds suffer a once in a century drop to know that long duration bonds could do that anyway.

But Alistair ought not panic yet. There will be a recovery of long gilt fund values as time passes; the issue is whether your investing time horizon matches the bond fund's at this stage. As time passes it certainly won't, as yours gets shorter but the fund's stays long.

I think you wildly underestimate the potential problem.

Over 2020-2024 long dated gilts ( in this case Vanguard long duration gilts index fund) dropped in value by over 50%.  This level of fall has not been seen for over 100 years.  It is far larger than typical long dated gilt volatility.

I am sorry for the OP but a 50% fall in bonds is unlikely to recover in less than a decade or two and possibly much longer.

Let us try to get a very rough estimate....,.  We dont know the average duration of the OPs gilts but I will take TR60 - 4% 22/01/2060 as an example.  

Basic data:
As a 4% gilt it is returning £4/year.
In  2020 its value peaked at £229 but is currently £90.
At maturity in 2060 it will be worth £100 + accrued interest

Rough calculation 
So by  maturity in 36 years time the gilt's value will be £100 and then there will be £4X36=£144 interest giving a total  value of £244, just £15 above its value in  £2020.

Or looking at things another way.  Consider the situation in 16 years time in 2040 and assume the bond is trading at par (£100) the gilt investment will then be worth £100+16X£4= £144 which is about 40% below its value in 2020.

Add in compounding of the interest
But we have ignored interest on the 4% coupon.  If we assume that is 4% then after 16 years that would increase the 16X£4 to about £95.  This would still not restore the investment's value to its 2020 level.  And of course we are talking about value in £ terms, not real.

What could the OP do now?
It will depend on how much is still invested in long dated gilts and how important the pension is to the OP's retirement plans.   However it would not be sensible to just hope for early recovery.  Unless interest rates quickly return to close to zero it wont happen.

Apologies for any arithmetic errors.

Hoenir

 The Long Gilts S6 fund doesn't have the gilt - TR60 - 4% 22/01/2060 - listed in it's top 10 holdings (60% of the portfolio) .  The top 10 all reach maturity by 2046 at the latest as well. 

Linton

Hoenir said:

 The Long Gilts S6 fund doesn't have the gilt - TR60 - 4% 22/01/2060 - listed in it's top 10 holdings (60% of the portfolio) .  The top 10 all reach maturity by 2046 at the latest as well. 

TR60 was just an example to provide real data to illustrate that it is unreasonable to expect the rapid bounce back with a long gilt fund that you may get with an equity fund.  Long Gilts S6 dropped by a bit over 50% from high to low during the recent gilt crash so I would say the point is still valid.

PS according to the fact sheet (https://extranet.secure.aegon.co.uk/static/sxhub/pdf/client-pen-longgilt.pdf) the fund has 3 of the top10 underlying gilts maturing after 2046, the longest being 2057.

gm0

Oh dear.

Investing is part arithmetic and part emotional.  A good way to lose your shirt would be to react to a 50% bond drop by selling the bonds, crystallising the loss. Buying expensive equities near a peak with that money. Then having them drop 50% shortly after that (a speculative example but could happen) and now being at 25% of the 2021 value. 
So some care is needed to navigate from here.  Personal education on investing and/or taking independent advice (with some education embedded in explaining next steps to you) may be more sensible than a rash action while surprised and upset by the latest statement.  My situation long ago when I got a 50% loss statement was quite different but I do remember how it felt based on my more limited understanding of such things at the time.

In my working lifetime what was considered "sensible" for a DC occupational pension or product to encourage or offer by default has changed several times.  Generic communications turned up announcing new feature.  The significance and risks of the new offer was not always easy to understand.  The way it interacts with what "could happen" in the world - even less so.  .com crash. Global Financial Crisis 07/08, Covid dip 2020.  Inflation spike. 

In many schemes and products - members can opt out of packaged goods and roll their own portfolio within a range of funds.  Advised about this by a financial adviser or by learning it themselves.  Employer schemes need to provide for the engaged and the less engaged audiences.  Members can usually opt into the lifestyler(s) as preplanned actions to not need to remember to do it, or can switch them off.  Again the signficance of this decision and the upside and downside risks it carries is not easily grasped. 

Ugly as it is to hear it - the *key point* up thread is that a scheme has *no choice* to do anything other than what the member has selected.  It cannot 2nd guess evolution of personal plans.  Nor whether an investment is too risky or too safe - in accumulation or approaching retirement *for this individual*.  They clearly should not be offering stuff that is unsuitable for everyone.  And they don't.   

Nor can they tell if the annuity focus lifestyler no longer fits - because the member has now decided to use drawdown (per Osborne reforms) but hasn't updated their pension to actually target doing that.  Or the member just didn't realise they needed to do that.  They can prompt. They can send wake up packs.  And encourage you off to Pensionwise or to an adviser.  And that is about it. 

To the OP point on bond safety - gilts (bonds) are less of a speculative, volatile and generally high risk investment than equities. Most of the time.  And the value of having a mix of both is well explored.  
So over the long haul the general statements made in the prospectus are basically true.  A vs B.
Yet most of the time is not all of the time. And a particular event can be very ill timed for particular cohorts of retirees.

For the scheme/product (Aviva here) - if the chosen option has ten years of automatic asset allocation changes in it - 55-65 - they must be made until or unless you instruct them to switch you to a different product option.  There is no market timing or deciding not to do it just now - on your behalf.  A massive can of worms opens if the "admin" people start trading your portfolio guessing about the market.  What if they win ?  But what if they lose ?  Who pays for that. You ? Them ?  The government ?

Now active investment funds do exactly that. It's what they say on the tin.  Fund manager is stock picking on your behalf.  Most other actors in the world of pension schemes and financial advice *don't* play market roulette for you.  It is widely misunderstood.  Many people assume and believe that various brands/products/advisers are doing a lot more in this regard to "manage their investments" or to "protect me" than is actually the case.   Comforting sales messages clearly play a role in promoting that misunderstanding.

So OP is in very good company having had expectations that now prove unfulfilled. When you fall in a hole you did not even realise was there.  In some particular set of circumstances (as here with the interest rate spike and gilt funds).

We have annuity lifestyling in the frame here which set the stage for this unfortunate sequence of events. 

And why do we have it - precisely because people had their retirements ruined by a sudden equities market revaluation just before a fixed date where they planned to make their annuity purchase.  Equity market down 60% and well below long term trend line.  Sell the lot.  Buy the annuity.  Or delay retirement. Unless age limit reached - buy the annuity.  But then pension income is down by a similar amount to the market drop and that is locked in forever.  Retirement ruined.  This "lifestyler" solution to that problem was pushed onto the industry to shut the stable door after that particular horse had bolted for a few cohorts.  So it does what it says on the tin. Money goes to government bond investments which move correctly with annuity rates to protect the value of the annuity purchase and away from betting on the future revenues of big american companies in the stockmarket. 

So the issue is whether an individual chooses the correct product or scheme option - for them
And remembers to keep that up to date if their circumstances and goals change. 
You can sleep through it all for 25 years and nothing bad may happen.  Or as here.  Something can.  It is pretty hard to make these product selects fully informed decisions.  And being wise *before* the event about what will be right for the surprise event / next crisis around the corner is like predicting next week's lottery numbers.

JohnWinder

I'm back with Alistair on this one. I accept Aviva reasonably believes he might want an annuity in ten years time and starts adjusting the portfolio a al lifestaging with more bonds and less equities. Aviva chooses long bonds; who cares if their value falls 40%, because the consequent higher yield will mean a higher yield when he buys his annuity.

But Alistair doesn't have to be the one holding the longer bonds for that safety net to work. Aviva could have moved him into intermediate or short term bonds which would have seen less collapse in value and thus more money available to buy his annuity which would still be offering a great yield because long bonds' yields are high.  And if Alistair had decided not to buy an annuity (who wants to commit ten years out unless it's necessary?) but still wanted lifestaging to protect his retirement savings somewhat he'd have expected less volatility with shorter term bonds n'est pas, which is what a retirement portfolio wants?