Does your retirement solution withstand the volatility test?
Risk management in retirement is key to helping a pensioner sustain income for life – to cover their essential expenditure and to draw more in the early years when they are more active.
According to retirement income specialist, Just, the COVID-19 market crash is exposing the shortcomings of outdated risk management strategies that have relied purely on investment tools to tackle all risks in retirement. Many pensioners invested in old-style living annuities are seeing their drawdown rates rise and are consuming capital that won’t be there to benefit from any future market recovery.
Instead, CEO Deane Moore recommends considering new-generation living annuities that offer pensioners the option to invest a portion of their assets in a lifetime income portfolio that guarantees an income for the rest of their lives, no matter what happens to investment markets.
“The good news is that the cost of purchasing a guaranteed income for life has gone down by almost as much as the fall in value of balanced portfolios,” says Moore. “This means that a pensioner can secure broadly the same guaranteed income for life today as they were able to do before the market crash.
Furthermore, they will still participate in any market recovery because the annual increase in this lifetime income is linked to the investment return on a balanced portfolio of assets managed by independent asset managers, smoothed over six years to make the increases more stable from year to year. Each year’s increase sets a new level of income that is guaranteed for the life of the pensioner and can never go down.”
How is the guarantee guaranteed, especially in volatile markets?
The liability is precisely matched on the firm’s balance sheet by investing in a cashflow-matching fixed interest portfolio (to ensure that the minimum guarantee can always be met) and a multi-asset portfolio (usually a flagship balanced portfolio of a well-known asset manager), to which increases are linked.
A mathematical calculation with a single auditable outcome determines how much needs to be held in each of these two portfolios to ensure that the total assets and the total liability move by exactly the same amount if there is either a change in interest rates or the market value of the multi-asset portfolio.
Just reports that its with-profit annuity solution, which was designed for exactly these market conditions, is performing as intended, shielding pensioners from market instability and protecting their guaranteed income.
“The recent market conditions were an extreme test of the robustness of this approach and we are pleased with how Just Lifetime Income has held up, providing pensioners with peace of mind and keeping the firm’s assets and liabilities in balance to continue to withstand current and future volatility.”