The 8 per cent fall in the value of 15-year gilts between August 2012 and September 2013 shows that existing lifestyle structures are not fit for purpose says pensions analyst Dr Ros Altmann in a wide-ranging report that says pension products are not keeping pace with changes in society.
The report, sponsored by MetLife, argues that sticking rigidly to switching into supposedly low-risk assets means pension savers are still exposed to possible losses in the fixed income or government bond markets and can miss out on stock market gains which could otherwise be achieved. Stock market growth in retirement will also be missed.
The report is also critical of target date funds, arguing these funds can still be risky depending on the manager. If they have a bullish view on equities they might stay invested closer to the target date and still be vulnerable to last minute shocks. Or if they switch to bonds and the bond market falls sharply, investors will still suffer losses. Pension savers may also not actually retire at the ‘target date’ their fund has aimed at and may, therefore, actually be better off in riskier potentially higher return assets for longer, and also make extra contributions, Altmann argues.
The report says people concerned about protecting the value of their pension fund should consider guaranteed pension products, such as unit-linked guarantees that offer you a guarantee on future income or on the capital value of assets while still having the chance to benefit from rising markets.
Research carried out for the report found advisers believe 60 per cent of their clients are relying on stock market outperformance to deliver retirement income, yet think only 33 per cent of their clients will achieve their target retirement income. But 69 per cent of advisers believe clients would be more likely to save into a pension scheme if it guaranteed a level of income, and 73 per cent of advisers believe clients would be more likely to save into a pension scheme if it guaranteed their capital.
Altmann says: “Gilt investments have lost around 10% of their value since August 2012 – hardly ‘safe’: If workers are not buying an annuity, then gearing their investments to annuity purchase will not be right. In addition to this, switching their investments into what are considered to be ‘low risk’ bonds in order to protect the pension fund may also be inappropriate because these bonds may not work as assumed. In the past year, an investment in government bonds could have lost 10per cent of its value as gilt yields have risen. Hardly ‘low risk’. This way of protecting pension funds before retirement has let many people down. They would have been better staying invested in the stock market than losing money by relying on ‘safe’ government bonds.
“As the state pension is being cut and employers will no longer guarantee good pensions, auto-enrolment aims to replace the falling pension provision elsewhere. But most workers will be put into defined contribution schemes, where the final pension depends on investment returns and annuity rates. The inadequacies of the standard investment options being offered and the scandal of poor value annuities means that the pensions people ultimately receive are likely to disappoint.
“Pension funds are geared to buying annuities but advisers do not believe this is best: Most pension scheme default funds also assume that, on retirement, workers will buy an annuity. Investments are often automatically switched into ‘low risk’ bonds in the run-up to the pre-set ‘retirement’ date, in order to reduce the risk of loss just before retirement and to prepare for annuity purchase. This strategy may be wrong on two counts. Firstly, workers may not actually buy an annuity. Secondly, the bonds that are bought may turn out to be more risky than expected.”