Deaccumulation

Executive summary

In many developed nations the model of investing for old age has failed to adapt to demographic change and is ill-suited to the financial pressures to come. Rising dependency ratios and inadequate savings mean that those approaching retirement today are vulnerable.

For example in America just two-thirds of households have retirement savings and the median pot is just $100,000. Likewise the average British worker at retirement can expect an annuity less than the state pension. In Germany perhaps a fifth of people retiring in 15 years face poverty.

There are three fixes: work longer, start to save more or earlier, or higher investment returns. One and two are longer-term solutions. But for today’s soon-to-be retirees the only hope is a higher returns on their savings. The best way to do this is by increasing the growth profile using a so-called deaccumulation strategy.

Asset managers are ideally placed to offer this, having long met the asset accumulation phase of a person’s lifecycle with growth portfolios. Yet post-retirement has historically been covered by insurance annuities, using very conservative allocations unsuited to boosting returns.

What is more, a person’s remaining life span is more important in determining portfolio risk tolerance than their current age because it dictates the relevant time horizon of investments. A longer horizon should lead to a greater allocation in growth/risk assets as the probability of them outperforming fixed income annuities rises.

So the need for more money over more years means that growth investments must be extended beyond the asset accumulation phase. One-quarter of UK retirees eventually return to work. In the US, a fifth of the over 65 population participates in the labour force and should live for another two decades. By 2050, the average 75 year old German will reach 90. Deaccumulation strategies that allow for a manageddrawdown of funds in retirement, a certainty of income, while still providing controlled exposure to growth assets would hugely benefit this retired or near-retired population. Such innovations are urgently need to help solve the looming savings crisis.

Finally, a higher allocation into growth assets also directs savings into more productive investments, spurring economic dynamism. This is a chance for the financial services industry to demonstrate the vital role it can play for society.