TPT Retirement Solutions’ Georgie Edwards sets out why private markets can play an important role in DC pensions after retirement – but only if schemes can navigate an increasingly uncertain policy landscape.
For much of the past decade, the pensions industry has focused on one question: how can defined contribution (DC) schemes introduce greater allocations to private markets?
As members accumulate larger pension pots and spend longer in retirement, investment strategies can no longer assume that retirement marks the end of long-term investing. Instead, schemes must find ways to generate sustainable income while continuing to invest for growth over what could be another 20 or 30 years.
Georgie Edwards, associate director, DC proposition at TPT Retirement Solutions, says DC account values are now at a tipping point. “If we look at pension pots in aggregate, they’re starting to become more meaningful sum, too meaningful for them to be cashed out at retirement.”
That shift has changed the industry’s priorities. Rather than simply helping members accumulate savings, schemes must increasingly guide them through retirement itself.
“We need a pathway towards that now,” she says. “This is about education. It’s about customer affinity. It’s about realistic savings adequacy levels… protecting people from poor outcomes.”
The challenge is considerably more complicated than it was when annuities dominated the retirement market. While pension freedoms have given members greater flexibility over how they access their savings, they have also transferred responsibility for making difficult financial decisions onto individuals.
Georgie Edwards will be speaking at Longview‘s DC Decumulation Investment Summit in September
“People are really struggling to make sense of those flexibilities and pick the right option that suits their needs,” Edwards says. “There’s a multi-prong effort to now try and encourage people to support a sustainable income, while also enabling people to retain those flexibilities.”
Those decisions are becoming increasingly significant because many retirees may simply not have enough money to achieve the retirement lifestyle they expect.
Using TPT’s modelling, Edwards estimates that members would require pension savings exceeding £600,000 to generate a sustainable retirement income above the Pensions UK’s moderate living standard over their lifetime.
“There will be a very small percentage of people retiring today, and even in the next probably 10 years, that will have in excess of that,” she says.
That reality influences how TPT thinks about investment strategy after retirement.
Rather than becoming increasingly defensive as members stop working, Edwards believes retirement portfolios should continue investing for growth where appropriate. Members may require cash to fund spending over the next year or two, but assets earmarked for income a decade into retirement can continue to pursue higher long-term returns.
“It’s having the right blended investment strategy that is sufficiently diversified to offer sustained long-term performance,” she says. “You don’t need to touch the money that’s been put away to afford your income in three, five or 10 years, and so you can go for a higher growth potential for the money that’s set aside for your longer term.”
Private markets therefore continue to have a role beyond retirement, rather than simply during the accumulation phase.
TPT has increased its allocation to private credit within its retirement strategies, viewing the asset class as both a diversifier and an additional source of return compared with traditional fixed income investments.
“We’ve added a fair bit of private credit, particularly during retirement phase, because it is a diversifier that means you’re not fully exposed as you would have been traditionally to bonds,” Edwards explains. “Private credit is helpful to generate a little bit more return for customers.”
The firm’s retirement strategies also continue to hold growth assets, albeit with a lower-volatility bias than during accumulation, reflecting the fact that retirement remains a long-term investment journey rather than a single event.
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However, Edwards argues that investment strategy is only one part of the challenge. Equally important is the increasingly uncertain policy environment in which members are trying to plan their retirement.
Questions around future state pension policy, means testing, retirement ages, income tax and inheritance rules all make it harder for individuals to make long-term financial decisions.
“The stability of the state pension system is a piece that we need genuine cross-party agreement on,” she says. “There is belief out there among a whole cohort of our younger people that they won’t even receive a State Pension… To be able to plan ahead, and for us to even build tools that enable us to support customers with their planning, we need some stability in the system.”
That same long-term perspective also shapes TPT’s approach to the government’s productive finance agenda. Edwards believes private market investments can sit comfortably within retirement portfolios, provided they continue to meet schemes’ fiduciary obligations.
“First and foremost, the schemes and the trustees are there to invest for the benefit of the members,” she says. “If there are new opportunities that allow us to diversify, generate an appropriate return for the right level of risk, and the payback period is appropriate for the scheme and the membership profile, then the trustees and our advisers would certainly recommend that.”
Operational barriers to investing in less liquid assets have also eased considerably in recent years. Edwards says investment platforms have become far more capable of accommodating private market investments, while schemes are becoming increasingly comfortable incorporating them into retirement strategies.
Perhaps the biggest change, however, is how schemes think about retirement itself. Until recently, decumulation was often viewed as something that began when members approached retirement. Edwards believes that mindset is changing.
“I think the conversation is extending more widely,” she says. “There’s a better understanding of what the pension is there for, and that can only be a good thing.”
For schemes seeking to incorporate private markets into retirement portfolios, that may prove the most significant shift of all. The future of decumulation is no longer simply about helping members spend their pension savings – it is about giving them the confidence to remain invested throughout what could be decades of retirement.