Jeff Salway: Pensioners at risk from new funds

A pop-up maze in Glasgow's George Square. It isn't obvious which way to turn since pension deregulation. Picture: John Devlin
A pop-up maze in Glasgow's George Square. It isn't obvious which way to turn since pension deregulation. Picture: John Devlin
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New and re-branded funds aimed at liberated savings may not spread risk as well as they claim, writes Jeff Salway

Multi-asset funds offering one-stop shop access to a range of different asset classes are the most prominent, while equity income and “absolute return” funds are also being launched or re-branded in order to attract cautious pension investors.

Look at Tesco where dividend yield was slashed and the share price collapsed

But there are concerns that investors could pile into heavily-marketed funds without understanding how risky they are.

Half of 55 to 65-year-olds in Scotland don’t plan to take financial advice on withdrawing cash from their pension, according to research by Brewin Dolphin, suggesting many could end up investing their savings in funds that aren’t suitable for them.

Expectations of a surge of money into multi-asset and other funds arise from wide-ranging pension reforms that took effect on 6 April. Under the changes, people aged 55 or over and in defined contribution (DC) schemes can now take their pension pots in one go, with no obligation to use their cash for a retirement income.

One in three people accessing their pension under the new rules intend to invest at least some of it, according to research by PwC, rather than buying an annuity or entering a “drawdown” contract.

Large chunks of that cash could be destined for multi-asset funds. These can invest in assets including shares, bonds, property and cash, with the level of exposure to each amended by the fund manager in accordance with market or economic conditions. The approach is built around the diversification provided by investing in different assets that have a low level of correlation.

Threadneedle, Barings, Schroders, Aviva, BlackRock and Legal and General are among several fund management houses to have launched or re-launched multi-asset propositions in recent months in a bid to cash in on demand from pension savers. Perhaps the best known is the Standard Life Global Absolute Return Strategies (GARS) fund, which at £23 billion is also the largest.

The latest to join the fray is Aberdeen Asset Management, which last week launched a range of low-cost multi-asset funds aimed at retired investors.

A growing number of fund companies are entering this market because they expect demand to grow rapidly as more people take control of their pension investments. Up to £133bn could pile into post-retirement investment products over the next decade, researchers Spence Johnson estimate.

Almost six in 10 financial advisers consider multi-asset funds as a way of providing income in retirement, ING Investment Management research found recently.

The funds are also likely to play a bigger part in workplace and personal pensions, with so-called “lifestyle” funds (which de-risk on the approach to retirement) only suitable for those planning to buy an annuity.

Jason Hemmings, partner at Cornerstone Asset Management in Edinburgh, is an advocate of multi-asset investing.

“Multi-asset funds or indeed multi-asset portfolios generally reduce overall risk and investment volatility through a broader spread of investments,” he said. “Overlaid by tactical asset allocation and discretionary management there are many portfolios/funds suited not only to the more aggressive investor but also those with a more conservative appetite towards investment risk and volatility.”

They tend to be promoted as a way of mitigating volatility, but (as Hemmings suggests) the level of risk can vary significantly between different types of multi-asset funds. While some invest only in shares, bonds and conventional alternatives such as property and infrastructure, several use less conventional instruments such as currencies and derivatives.

Charges vary too, often in relation to the assets and tools used.

“The lower cost solutions generally invest in index tracking investments, whilst the more costly options will include another layer of cost for the active management of underlying investment funds they choose within the portfolio,” said Hemmings.

“A blended approach has become increasingly common to bring the overall cost of investing down.”

Anyone accessing their pension pot needs to establish their exact objectives before even thinking about fund types. While one person’s priority might be to preserve their pension fund in real terms (so keeping pace with inflation), for instance, another’s might be happy for the capital to be gradually eroded in retirement.

A reliable income is the biggest priority for many pension investors, but the most popular ways of securing a yield can also pose a threat to the pension pot.

“Equity income funds and some direct shares holdings carry the benefits of handsome income yields and potential for real capital growth, but don’t underestimate the risk to capital,” Hemmings warned. “We only have look at Tesco as an example, where the dividend yield has been slashed and the share price has collapsed over the past 12 months.”

The same note of caution applies to the high-yield corporate bond funds that are also popular among income seekers.

“This is why the majority of consumers should take advice before deciding upon the most appropriate strategy.”