Introducing blended income portfolios is essential to provide members with greater flexibility and resilience, surpassing the limited options of annuities or cash at retirement, ultimately enhancing member outcomes.
Developing personas and robust default solutions can cater to the diverse needs of members, ensuring personalised and effective decumulation strategies and enhancing member engagement.
A more comprehensive investment approach that includes diversified real estate and other alternative assets, supported by evolving regulatory frameworks and improved advice, is crucial to address the gaps in decumulation support and improve member outcomes.
During our recent Defined Contribution Roundtable, we brought together industry experts to discuss the historically overlooked decumulation phase in defined contribution (DC) plans, through the lens of enhancing member outcomes.
This discussion highlighted the need for innovative strategies, personalised approaches, and effective communication to support members as they transition from accumulation to retirement.
The group coalesced around the importance of simplicity.
George Fowler, Partner at IsioIt’s about having a decumulation framework that allows people to make a few decisions, but then the rest is essentially done for them. This means moving into more of a default world.
"It's a really difficult thing we're asking people to do: moving from monthly salary to a pot of money and understanding how they relate to each other. So we just need to focus on making that easy for members" added Alison Bostock, director at ZEDRA Governance.
One of the main points of discussion was the necessity to move away from the two options that members currently choose from at retirement: converting their portfolio’s value into a drawdown annuity structure or taking cash. This decision often hinges on the value of one’s portfolio and the prevailing interest rate environment on the day of retirement, which massively affects member outcomes.
To address these challenges, asset managers are developing innovative retirement income strategies, such as blended income portfolios, to offer more flexibility and resilience.
The conversation underscored the need for the investment industry to frame retirement solutions in ways that resonate more naturally with members’ financial realities. This shift in perspective can help ensure that members make more informed and beneficial decisions regarding their retirement incomes.
“Individuals don’t think in percentages or yield. They think in normal salaries,” explained Georgina Taylor, head of UK Multi-Asset Strategies at Invesco.
The roundtable participants agreed that there is a growing recognition of the need for more personalised approaches to decumulation that reflect the unique circumstances of each member.
“Everybody needs a customised solution, so then the question is, ‘How do we as an industry deliver a customised solution given the limited resource we have?’” said Ian Pittaway, chairman of the Aegon Master Trust.
Several participants proposed developing personas to measure risk appetite and determine the appropriate allocation of a member’s pot. One solution might be separating members’ pots into cash, income, and growth portfolios to provide a balanced approach when fully individualized solutions are impractical. This method allows for flexibility and can cater to different, and often unpredictable, life events and work arrangements in retirement.
While more options may be beneficial to some members, others may suffer from decision paralysis.
Member communication and education are paramount. However, the industry should accept that members frequently do not engage to the extent necessary, partly because DC pots are often smaller components of their overall retirement savings compared to defined benefit (DB) pots.
Ultimately, we need to have an effective default solution that trustees design for members who, for whatever reason, do not want to engage in the detail,” said Stephen Budge, head of DC investment strategy at Lane, Clark & Peacock.
“Many families are too busy trying to survive and figure out how to pay their gas bills, while hoping that the future will sort itself out,” added Simon Redman, managing director and head of DC and Wealth at Invesco.
The group also noted the significant gap in advice and support available to members once they reach the decumulation phase.
While master trusts provide a strong solution up until retirement, members too often move into suboptimal and expensive strategies. This transition is not given enough attention by the industry and usually results in members not maximising the potential of their retirement savings.
The UK regulatory environment, encouragingly, is evolving to establish a more robust framework for the post-retirement phase. This includes guidelines to ensure greater flexibility and risk management within pension arrangements, accommodating the complexity of retirement planning.
“Ultimately,” said Anthony Ellis, head of Investment Consultancy at Hymans Robertson, “the biggest problem in retirement is that people aren’t saving enough and aren’t able to retire when they want. There’s got to be an investment return angle to help that. I’m in favor of a more rounded investment return approach.”
The rest of the group concurred that adopting a more well-rounded investment approach — one that may include growth assets and alternatives — is essential. Flexibility of access, combined with strategies such as liquidity pooling to manage longevity risk, can significantly enhance member outcomes.
At Invesco, we prioritise collaborating with clients to design tailored DC offerings and solutions that meet their unique needs. Our extensive toolkit and global reach equip us to address a wide range of DC scheme challenges, whether it's enhancing passive exposures, integrating alternatives, or tackling post-retirement requirements.
As Kate Dwyer, Head of UK distribution at Invesco, explained, “What’s become clear is innovation is core to developing and designing propositions for the needs of the clients of the future”.
As part of this we have recently launched Retirement Solutions Hub that includes our Retirement Whitepaper series, and the 4-Life retirement framework, and is designed to provide access to our wide range of content covering various retirement topics, which we plan to continuously adapt in alignment with regulatory and member needs.
We also recently announced the launch of our Secured Lifetime Income (SLI) product, a unique retirement solution designed to meet the evolving needs of today’s retirees. Developed in partnership with retirement specialists Just Group plc, this launch marks a significant milestone in our ongoing commitment to addressing retirement needs.
The latest annual Invesco Defined Contribution Roundtable, chaired by Mary Cahani, Head of Defined Contribution (DC) at Invesco, brought together leading industry participants to focus on innovative solutions aimed at improving member outcomes.
Explore how an ageing population can drive global inflation, impact policies, and necessitate new retirement planning strategies. Learn more.
Explore expert insights as Michael O’Shea discusses the FCA’s proposed Value for Money (VfM) framework for default DC pensions.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Property and land can be illiquid and difficult to sell, so the fund may not be able to sell such investments when desired and at the intended price. The value of property is generally a matter of an independent valuer’s opinion and may not be realised. Real estate investments are typically not listed on regulated markets and need to be valued via the application of appropriate models (potentially applied by independent experts): this may lead to inaccurate valuations which may not be reflected into transaction prices.
Changes in interest rates, rental yields, FX rates, market trends and general economic conditions may result in fluctuations in the value of the assets and of the fund and in the level of cash-flows generated. Real estate investments are exposed to counterparty risk, which is the risk that a counterpart is unable to deal with its obligations. The fund may use derivatives (complex instruments) and borrowings, which may result in the fund being significantly leveraged and may result in large fluctuations in the value of the fund. Real estate investments can be exposed to new sustainability-related regulatory requirements and trends that may negatively affect the value of those assets which are not compliant and can envisage significant costs to be invested to comply or to simply improve their sustainability profile. In addition, real estate investments can be also significantly exposed to negative economic effects stemming from climate change, natural disasters and the general preference of investors for assets with better sustainability features. Real estate investments are labour-intensive and present a significant amount of human/manual inputs and activities, hence potentially exposed to several types of operational risks that may affect areas such as administrations, operations, reporting and others. The underlying funds might make use of debt to finance investments which may result in the fund being more leveraged and may result in greater fluctuations in the value of the fund. Many Real Estate investments are illiquid, meaning that the fund may not be able to sell them quickly at a fair price and/or that the redemptions may be delayed due to illiquidity of the underlying investments.
If on any given Redemption Day of the Sub-Fund, the applications for redemption of units of the Sub-Fund represent in aggregate more than: (i) 3% of the Net Asset Value of the Sub-Fund per calendar month, (ii) 5% of the Net Asset Value of the Sub-Fund per any rolling 90 calendar days period, or (ii) 20% of the Net Asset Value of the Sub-Fund per any rolling 365 calendar days period, IMSA may decide to (a) start applying the Monthly Investor Limit (as described hereafter), (b) cancel all requests received on such day, and/or (c) decide that no further applications for redemptions shall be accepted until the first redemption day of the following calendar month or until further notice. Any such decision will be published on the Website of the Sub-Fund (https://invesco.eu/gdpf). IMSA also reserves the right (irrespective of whether any limits have been exceeded) to limit the applications for redemption of units of the Sub-Fund to a percentage between 2% and 5% of each unitholder’s designation account per calendar month (the “Monthly Investor Limit”). Further to this where redemptions have exceeded lower redemption limits (as may be determined by IMSA), IMSA may decide that no further applications for redemptions or conversion shall be accepted until further notice.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change.
For more information on our funds and the relevant risks, please refer to the Offering Memorandum, the Annual or Interim Reports, and constituent documents (all available in English). These documents are available from your local Invesco office. A summary of investor rights is available in English from www.invescomanagementcompany.lu. The management company may terminate marketing arrangements.
The fund, as a Reserved Alternative Investment Fund domiciled in Luxembourg, is eligible for Well-Informed Investors (as defined in the Luxembourg Law dated 28 July 2023) and marketing in the EEA is permitted to Professional Clients only. The fund is a dedicated Luxembourg open-ended unregulated fund. It qualifies as an alternative investment fund (AIF) managed by Invesco Management S.A. as external alternative investment fund manager (AIFM).
EMEA3829825/2024
