Hymans launches ‘Brexit-beating’ higher risk DC strategy

BrexitA new Brexit-proofed approach to DC pension investment strategy launched today can give members 15 per cent higher pots, says by Hymans Robertson.

The new approach, designed to offset the effects of lower yields post-Brexit, shifts the focus of defaults away from volatility control in the early years of investing towards growth, exposing members decades from retirement to greater levels of risk.

Highly critical of Diversified Growth Funds (DGFs), he consultancy recommends an increase in factor based, or smart beta, investments, as well as high return diversifying alternatives such as private equity and infrastructure during the growth phase of saving. It then recommends moving away from a default approach to a more bespoke strategy for the pre-retirement phase, five years before retirement.

Hymans says analysis of over half a million DC scheme members on its Guided Outcomes framework has shown that post Brexit, the number of DC investors who will fail to achieve an adequate income in retirement has increased from two thirds to three quarters. As a result, some savers will now need to contribute up to 20 per cent of earnings to achieve an adequate income in retirement.

Hymans Robertson head of DC consulting Lee Hollingworth says: “Post-Brexit the reality is we’re going to see lower interest rates for longer. This will likely result in a negative impact on investment returns when pots are accumulating and on income conversion in retirement. As a result, the number of DC investors who will fail to achieve an adequate income in retirement has increased from two thirds to three quarters since the Referendum.”

Hymans Robertson head of DC investment proposition Anthony Ellis says: “We’ve evolved our investment approach to focus on delivering the highest possible returns for members, our expectation is an improvement in outcomes for members of at least 15 per cent – wiping out the implications of the Brexit vote for DC pension saving.  Key to this is accessing long-term risk premiums and reducing the focus on managing short-term volatility in the early years of investing. It’s a contra-view to that of the broader market, but we feel that the member outcomes are being negatively affected by the focus on controlling volatility rather than focussing on delivering increased returns. In the early part of a member’s savings journey, short-term volatility is almost immaterial compared to a member’s future value of contributions and investment returns. Long-term investors need to harness the long-term risk premiums that are available to them in order to maximise their eventual outcome.

“We’ve always looked at DC investment in three distinct phases – growth, consolidation and pre-retirement. The industry norm in the growth phase – when you’re more than 25 years out from retirement – is to utilise DGFs. While DGFs have a role to play in DC investment, it’s not in the growth phase. DGFs have delivered lower volatility but with correspondingly less return than traditional long-term investments. A smooth journey to a small pension pot is not a good outcome for members. What’s the point of paying for low short-term volatility when you’re 40 years out from retirement and contribute regularly? It’s an expensive way of getting less return in the early years of DC investing.

“Previously we’ve advocated a 100 per cent equity allocation in the early stages of investment. But the market is changing and more sophisticated investment strategies that have until now been the preserve of defined benefit (DB) schemes are becoming increasingly accessible to the DC market at a compelling price. This is partly driven by increasing scale in DC.

“As broader options are now available to DC schemes, in the growth phase we recommend a significant allocation to factor based, or smart beta, investments. Complemented with high return diversifying alternatives, such as private equity and infrastructure, for example.”