Longer retirements and the growth of guided retirement are challenging conventional approaches to DC de-risking, as schemes consider how much investment risk members should continue to take after they stop working.
The traditional DC glide path may need to be reconsidered as schemes increasingly manage members beyond retirement rather than simply delivering a pot at the point they stop working – opening the door to holding private market asset classes deep into retirement.
Investment strategies have typically reduced risk as members approach their expected retirement date, reflecting the diminishing time available to recover from market falls. But speakers at Longview Networks’ DC Decumulation Investment Forum questioned whether this approach remains appropriate when members could remain invested for another 20 or 30 years.
Alison Leslie, head of DC investment at Hymans Robertson, questioned the logic of beginning to de-risk a member at retirement when they could remain invested until their 80s. “Should you be de-risking at 50 if actually they’re going to live to 85, 90?” she asked. “Do we actually need to have more growth in there?”
For Martyn James, director of investment at now:pensions, the development of guided retirement means accumulation and decumulation should increasingly be considered as parts of the same investment journey.
“We need to think about growth assets being retained for longer,” he said, alongside considering “what de-risking looks like through the saving and retirement phases”.
This requires schemes to manage sequencing risk while maintaining sufficient growth and diversification to support members throughout retirement.
“What we want is a whole-of-life investment strategy,” James said. “I don’t think we need to split it into two phases.”
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Longer horizons
Mitesh Varsani, head of investment solutions at Scottish Widows, similarly argued that retirement itself should not necessarily represent the end of a member’s investment horizon.
For someone retiring at 65, the portfolio may still need to support spending for decades, potentially changing the appropriate balance between investment risk and security.
“The horizon is longer,” he said. “Let’s make sure we sweat the assets as best we can and match them to the right output.”
Sonia Kataora, head of DC investment at Howden, argued that the distinction between accumulation and decumulation is becoming increasingly blurred because different portions of a member’s pension effectively have different investment horizons.
Money required shortly after retirement needs to be treated differently from assets that will not be drawn for another 15 or 20 years. This creates a portfolio containing multiple time horizons rather than one that reaches its destination on a member’s retirement date.
Kataora said the glide path was “not necessarily dead as a concept”, but suggested its dominance could be challenged as schemes adopt a more outcome-focused approach.
Traditional de-risking has largely concentrated on reducing exposure to market volatility as retirement approaches; decumulation introduces additional considerations, including withdrawal risk and the danger that members are forced to sell assets following a market fall.
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From pot to income
During accumulation, investment performance can be considered primarily through the size of the pot ultimately produced. Once members begin withdrawing money, the stability and sustainability of their income become increasingly important.
Kataora argued that schemes therefore need to consider a broader range of risks than the investment volatility around which traditional glide paths have been designed.
Meanwhile, Varsani said schemes should avoid unnecessary friction as members move between accumulation and retirement, including abrupt changes in their investment exposure.
The result may not be the abandonment of glide paths altogether. Different members will still have different capacities for risk, spending requirements and retirement choices, while money required in the near term needs greater protection from market movements.
The point at which a DC scheme member retires is clearly becoming a less useful dividing line for investment strategy, which has obvious implications for how long they can remain invested in private markets.