Pension fund managers mean well. They really do. It is just that the strategies they use in their efforts to look after your money don’t always work.
Take ‘lifestyling’. This is the idea that five to ten years before you retire your savings should be shifted into less risky assets than before. This makes obvious sense. After all, if you haven’t much working life left, the last thing you want is to see the value of your retirement assets suddenly collapse by 20%.
The problem lies in figuring out what is a risky asset and what is not.
Most funds assume that equities are risky and that bonds are not. Take the Aegon Universal Lifestyle Collection Fund. As Richard Evans, writing in The Daily Telegraph, points out, it starts to switch your money into “supposedly less risky assets” six years before your specified retirement date. By the time you are a year away from your retirement, your assets will be 25% in cash and 75% in bonds.
Look to the pensions offered by Nest, the new government-supported vehicle for opt-in pensions, and you will see something similar. Its Pre-retirement Fund holds the majority of client assets in gilts and sterling bonds of some kind.
The same goes for most online portfolio services set up in the last year. Input your details, and the older you are, the more likely the suggested portfolio is to contain a hefty allocation to bond funds.
That might sound fine to you. But if the Aegon asset shift mentioned above had been completed two months ago, anyone holding the fund would now be down well over 8%, says Evans. Not so safe after all.
The key point is that large institutions can be slow to catch up with big market shifts. While bonds might once have looked the safest of assets, they are just coming out of a multi-decade bull market that – for the last few years at least – has been heavily supported by quantitative easing.
That makes them really very risky. As rates rise, the capital value of bond holdings will fall – making a permanent dent in the incomes of any soon-to-be pensioners holding them (they will have less cash to buy an annuity).
You can say it makes more sense to hold cash as you approach retirement, assuming that you are taking a lump sum in cash, or you are delaying buying an annuity or entering drawdown.
You might also say that rising bond yields and falling bond prices don’t matter for those buying annuities, for the simple reason that rising bond yields should also mean rising annuity prices (although that hasn’t been the case over the last few months).
But overall it seems a bit bonkers to allow a fund to shift all your carefully saved money into an asset that analysts such as Steve Russell at Ruffer consider “poisonous”, just as you need it most. If you are approaching retirement you might want to call and check what kind of fund you signed up to when you took out your scheme all those years ago.