We are delighted to see our Retirement Income range of model portfolios reach their three year anniversary.
The origins of the portfolios traces back to the announcement of Pensions Freedoms of 2014. It was clear that with Pensions Freedoms, clients would need good advice at a time when good advice matters most: in retirement.
Good advice matters most in retirement because you are grabbling with three linked variables to ensure the key retirement risk (running out of money) is addressed: pot size and how its allocated, withdrawal rate and time horizon/life-expectancy.
New, but not new
Our Retirement Income portfolios were a new concept at launch, but built on long-established pensions science practised in the institutional market.
In accumulation, most advisers use 5 portfolios to match 5 risk-profiles, where the risk and return assumptions are “long-run”. Just like our Select range. This is fine for when you are trying to grow a pot with regular top ups.
But what about when you are trying to shrink a pot with regular withdrawals?
Purpose-built for decumulation
For decumulation, we pioneered a set of 20 portfolios for advisers that are categorised not only by 5 risk profiles, but also by 4 time horizon buckets, and linked each of these to a matching set of withdrawal rates for each of 30 years to 2 different levels of confidence.
That means we link 20 different portfolios to 300 different withdrawal rates to match risk profile, time horizon and confidence level. Hence withdrawal rates are necessarily linked to asset allocation. This is key to getting the “Withdrawal Profile” right for clients in decumulation, in our view.
It might sound a bit complicated to start with, but all it does is just put the numbers behind a gut feel that a client taking out 0.5% per year could be too little, and a client taking out 8% per year could be too much.
Pot size, withdrawal rate, and time horizon by default all change each year. This makes it even more important for advisers to run annual reviews with clients to ensure their retirement plan is on track.
What’s so different about the portfolios?
If the needs, objectives, and risks between accumulation and decumulation are fundamentally different, it follows that the investment solutions are too.
Whereas accumulation strategies use a classic “asset-optimised” approach, when managing the Retirement Income portfolios, we use a “liability-relative” approach – being mindful that the portfolios are being used to support withdrawals for a given time-frame.
The main differences about our portfolios compared to what a lot of advisers use for accumulation is that they are 1) term-dependent; 2) dynamically managed and 3) duration-targeted as well as having a higher income/lower cost bias.
- Why term dependent? Clients’ retirement plans are term-dependent. Risk, return and correlation are term-dependent. It follows that Retirement portfolios should be term-dependent too.
- Why dynamically managed? A dynamic allocation overlay using our Risk Barometer aims to narrow the dispersion of returns, enhance risk-adjusted returns, and provide a smoother investment journey whilst mitigating downside risk. You don’t leave your car on cruise-control on the motorway when the going gets rough. The same applies to your portfolio.
- Why duration-targeted? Pension transfer values, annuity-income rates, and the bond portion of a portfolio are all interest-rate dependent. So, if that’s what your transferring, purchasing in the future, or holding now, then interest-rate sensitivity is key. Duration is the sensitivity of a bond portfolio to a change in interest rates. Duration-targeting considers this interest rate sensitivity in a way that is commensurate to investment term (a near-term withdrawal profile is treated differently to a long-term withdrawal profile), and is key to a “liability-relative” approach.
Because we have a systematic, rules-based approach to investing, it means we were able to generate over 10 years of simulated data prior to launch in 2017. But more important than that is the three years of actual performance data, where the portfolios have “done what they said on the tin” relative to their respective risk profile and time horizon.
Integration with Guaranteed Income
Our Retirement Income portfolios are exclusively available on the Novia Financial platform, not just because Copia is the investment solutions division of Novia, but because few other adviser platforms offer aggregated trading and fractional dealing of ETFs that these portfolios require to function from an operational perspective.
With Novia also being the only adviser platform to offer on-platform guaranteed income products, this creates the opportunity for blended or hybrid retirement solutions, where advisers can allocate not between equities, bonds and cash, but between retirement portfolios, guaranteed income and cash, to create a robust retirement plan that addresses clients’ needs and objectives in decumulation.
More than just portfolios
We are conscious that having a Centralised Retirement Proposition is more than just having a set of retirement portfolios that are purpose-built for decumulation. That’s why we created a Retirement Risk Profiler that focuses on key retirement questions with a focus on term, a Retirement Income calculator using withdrawal rates, and a Withdrawal Rates matrix.
With Adviser Suitability 2 bringing CRPs into focus, we’re delighted that our purpose-built CRP solution is now tried and tested and all of 3 years old. That may seem very young, but given the absence of innovation in the DFM and funds market, it’s now one of the older retirement propositions out there!
For our virtual cake share, a few words of thanks. Thank you to Novia for embracing this innovation from its concept stage back in 2016. Thank you to everyone in the Copia team for all their hard work in developing and managing the portfolios. And most importantly, thank you to the adviser firms that have entrusted us with their clients’ retirement pots to manage since those early years.