Rather than rush out an array of innovative investment products in the wake of the 2014 Budget reforms, fund managers are taking their time to create new products. Here we bring you five of the best ideas

This month, Pensions Insight intended to bring you ten – ten! – new investment ideas. At the end of last year, we imagined that by March there would be a slew of new products and ideas available to savers in anticipation of the imminent new pension freedoms. 

Not so. Most people PI has spoken to while writing this feature have expressed their surprise that fund managers and providers haven’t come out with a broader array of new products in the wake of the 2014 Budget reforms. 

innovation

We expected creative solutions in response to the anticipated demand for alternatives to annuities, such as a choice of mainstream income drawdown vehicles. After all, the institutional world will be fighting with its retail counterpart for retirees’ money.

Perhaps it was unreasonable of us to expect wholesale new investment offerings to launch so quickly. 

Nigel Aston, head of European DC at State Street Global Advisors, says: “For the first six months after the announcement I wasn’t expecting to see a lot. But I saw even less than I was anticipating and that’s both from the asset managers but also from the providers, platforms, administrators, consultants. However, over the past three months – and I guess it will continue to accelerate as April approaches – we’re seeing more.”

So instead of dazzling you with ten new ideas, here’s a whistle-stop tour through five innovations we believe are noteworthy. 

1. Hargreaves Lansdown’s drawdown offering

Hargreaves Lansdown has stripped out upfront investment charges from its retirement drawdown products. The investment services company is the first to launch a drawdown product in response to the new pension freedoms. Previously, it had charged £354 including VAT to arrange flexible drawdown and then £30 for every one-off payment. 

Tom McPhail, head of pensions research at Hargreaves Lansdown said: “We have made this new drawdown accessible by stripping out any upfront charges and developing a suite of
information and planning tools to help investors make the most of their retirement savings. 

“This is what the pension freedom revolution is all about; giving investors the tools and information to take control of and responsibility for their own retirement income, as well as financial advice if they need it.”

Hargreaves estimates that there are between 200,000 and 400,000 people waiting to take advantage of the new pension freedoms in April, based on the dramatic drop in annuity sales following the 2014 Budget. 

2. New DC benchmarks

Index provider FTSE Group has created a series of new investment performance benchmarks for UK DC pension schemes. 

The indices, which were developed in conjunction with advisory firm Elston Consulting, have been designed so that schemes using either lifestyle or target date funds can use them to evaluate the success of their investments.

FTSE’s underlying methodology can also be used to create custom benchmarks for any DC default glide path. 

The benchmarks have attracted a good deal of interest in the market. 

Bridge Trustees, the independent trustee which has been appointed to the Lighthouse Pensions Trust, has announced it will adopt the benchmarks as part of its governance process.

Ian Davies, an independent trustee at Bridge Trustees, said: “The recent Department for Work & Pensions consultation and draft legislation on default strategy reviews makes clear that proper evaluation and review of the default investment strategy will become a statutory priority. 

“For this we need the appropriate toolkit to inform a more meaningful discussion. The creation of the FTSE UK DC Benchmarks is a welcome and progressive step in this respect.”

In a world where the efficacy of DC default funds are under sharp scrutiny, other schemes are expected to follow suit. 

3. Alternatives as a component

The DC charge cap has presented asset managers with a challenge. How can they diversify beyond mainstream equities and bonds, while keeping costs under control? 

Alternative beta is one answer. 

“Basically, it’s a liquid, lower-cost access to alternatives,” explains J.P. Morgan’s Annabel Duncan. “The fund that we have is trying to capture hedge fund beta and risk premia in a very systematic way, trying to pursue positive absolute returns with low volatility. Under the bonnet in ours, it’s got an equal risk allocation to a variety of lowly correlated alternative strategies. It includes merger arbitrage, convertible bond arbitrage, equity long/short and global macro.”

How to make it affordable? 

Duncan gives the example of investing in merger arbitrage deals, where there is a lot of inherent risk – but also a risk premium for investors.

“Instead of trying to buy only the deals that you think are going to be successful, you buy all of the deals – there are probably 70-80 merger arbitrage deals going on at any one time. 

“It’s more of a systematic approach that allows you to capture some of that upside. And of course you will have some that fail. But over a longer period of time, you can see it delivers an improved outcome versus managers who are just trying to pick deals.”

4. Schroders’ new DC fund

Schroders was one of the first asset managers to launch a new fund – the Flexible Retirement Fund – in response to the new pension freedoms. “In the new world, it looks like most people won’t buy an annuity. We think there is a need for more flexible solutions,” said Tim Horne, Schroders’ DC investment solutions manager, at the fund’s launch in January.

The multi-asset fund has a goal of generating returns in line with the Consumer Price Index plus 2% for members over a three to five-year business cycle. It aims to limit losses to 8% over any time frame – although doesn’t make any guarantees. 

Loss limitation is the most interesting aspect of the fund, believes John McLaughlin, Schroders’ head of portfolio solutions. 

Speaking at the same launch event, McLaughlin made an analogy between investment volatility and personal stress management. “Just before you go into an exam, you have adrenaline and perform well. At other times though, perhaps if you haven’t revised, you could find yourself in panic mode and get writer’s block. When stress gets too high, we perform badly.” 

What to do when stress strikes in the form of a spike in investment volatility? Some of us deal with stress badly, reiterated McLaughlin. Others learn that taking a break is a good way to deal with stress. 

“When volatility goes above 6%, we take a break,” he explained. If something spooks the market, Schroders would immediately put a quarter of the portfolio into cash – so if, for instance, stress is at 8%, they would sell out and take volatility down to 6%. 

Responding to a question about whether this means the fund manager will always end up selling at the bottom of the market, McLaughlin said: “In 2008, the market became very stressed and gave us warning – we got out fast. But sometimes you will follow the market down when risk is very unexpected. So you will lose, but you won’t lose out as badly.”

5. A new retirement platform

Nigel Aston doesn’t buy the idea that retirees with mid-sized pension pots are going to eagerly engage with complicated investment decisions. 

Instead, State Street Global Advisors’ head of European DC predicts that the bulk of retirees will avoid advisers and seek out simple ‘drawdown-lite’ products that pay out predictable and sustainable levels of income. 

“We think there’ll be a new market for the majority of people who want a drawdown-lite approach; they want other people to make decisions on their behalf and it will be more default-driven than choice driven. That’s where we’re concentrating our efforts,” says Aston. 

Aston expects little appetite from trustees and plan sponsors to shoulder the burden of looking after members after they retire and expects them to look to mastertrusts and platforms instead.  

“You can imagine a situation where some of the large mastertrusts – either the not-for-profit ones or the truly commercial ones – will say: ‘We’ll aggregate all those individuals at retirement.’ You’ll get to 65, they’ll leave your scheme and go across to Nest, or the People’s Pension, the Pensions Trust, or one of those. 

“Or you’ll be on a platform with Standard Life, Fidelity, Zurich, whoever. And instead of being part of a trust or part of a corporate plan, you’ll move across, it’ll be relatively seamless for the individual, but they’re sort of on their own, but you still have a plan that is well governed.”

This is less a concrete development and more of a nascent idea that will take time to develop. But the idea of pooling individual savers from different schemes in a single retirement platform may well take off. The onus is now on the industry to set up a platform that works.