What does a simple white T-shirt have to do with pensions and investment strategy? Forgive the tenuous links, but here goes ... 

The Bear 

I recently finished watching the latest season of The Bear on Disney Plus. A fantastic series, and I can’t recommend it enough. The series centres around Carmy Berzatto, a young and talented chef whose signature style includes donning a simple white T-shirt (made by Merz B. Schwanen if interested!), that epitomises simplicity and elegance - and looks great. 

Carmy’s journey unfolds as he returns to his hometown, Chicago, where he takes charge of his deceased brother’s chaotic sandwich shop. In the latest season, the shop closes, making way for a more refined dining experience. The season ends on a high note (for most anyway), with the new restaurant successfully opening up to family and friends.   

While the entire season was a delight in my view, the real highlight came near the end. At that point the music began, overlaying the final few scenes of the series. And the song that plays is a track I'd not heard for a while – REM's Half a World Away – one of my favourite REM songs.   

Back to the Future  

Music has the ability to instantaneously transport you back in time to particular moments in your life. For me, I may as well have jumped into Doc Brown’s DeLorean and have been transported straight back to the early 90s, and to my first year at university. Back when I was young and carefree. 

Back then I did not give too much thought to the distant future, let alone about pensions. Who would? Pensions were a distant concept to someone in their late teens. 

Fast forward 25 years later, and who’d have thunk it - life has led me into the pensions and investment industry, where I now focus on DC pensions and investment.   

The Bull 

As many of you will no doubt be aware, within DC investment strategy design there is this concept called the glidepath or lifestyle strategy. It aims to invest your pension investments in a risk managed way, by investing in riskier assets when you are young and years from retirement, and gradually shifting to safer (less risky) investments as you approach retirement. The idea is that as retirement draws near, you are less able to tolerate asset risk. Some of these glidepaths begin this de-risking process 15 years before retirement.

Now, admittedly, I’m no spring chicken anymore, and I’m approaching my half century soon. Therefore, this de-risking could occur in the next few years for me!

Recently, I’ve been asking myself is that really the best strategy for me? With the prospect of potentially spending two to three decades in post-retirement life, why should I de-risk my pension investment strategy now, while there's still ample time to grow my wealth? 

Is it not wiser to keep some risk exposure or even increase it, leveraging potential returns from the stock market? What about inflation eroding the purchasing power of bonds, or rising interest rates decreasing their value? These questions have been gnawing at me, and I'm certain many of you share similar concerns. 

The evidence suggests that as pension investments grow larger, the most common approach to take pension will be through income drawdown (Retirement income market data 2021/22 | FCA). After retirement, you'll have a pension pot from which you draw income to sustain your post-retirement life.   

Traditionally, investment strategies on a drawdown glidepath lean heavily towards de-risking, resulting in a much-reduced allocation (c. 30% according to the latest Master Trust and GPP Defaults Report – April 2023) to growth assets at retirement. While this approach aims to reduce equity volatility and sequencing risks, is it wise to try to reduce these risks so drastically, noting that you might still have two to three decades of post-retirement life? Are members being best served by this reduction in growth assets? 

My own view is that blindly following the conventional wisdom of de-risking, especially when not targeting a specific retirement outcome (such as taking cash or buying an annuity) carries its own risks. However, members will need to assess this individually, as each person has unique goals, preferences, and circumstances. Like a simple white T-shirt, there's no one-size-fits-all approach! 

Back to the Future Part II 

The recent Mansion House speech by the Chancellor serves as a timely reminder that strategies for at and post-retirement are still evolving.  The pensions industry is actively innovating to better support members in achieving favourable retirement outcomes. My colleagues, Paul Waters and Jon Hatchett, have recently published a white paper on this.   

Their paper delves into various post-retirement product options, and they explore both traditional choices that are currently available, such as annuities and income drawdown, as well as newer offerings entering the market, like risk-sharing models such as CDC (Collective Defined Contribution) and longevity pooling. 

With more innovation and purposeful at and post-retirement solutions, members should ultimately be better served. Members should, however, carefully evaluate the available choices based on their particular circumstances, both at and beyond retirement, but perhaps the use of risk-sharing instead of risk-minimisation could be a rewarding evolution to pension scheme investment strategy design?  

Please do get in touch if you’d like to discuss.  

This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.