crs seminar 9 december - tisa · crs seminar 9th december ‘issues in decumulation’ christopher...

CRS Seminar 9th December

‘Issues in Decumulation’

Christopher NicholsStandard Life

@uktisa

This communication is intended for investment professionals only and must not be relied on by anyone else.

Christopher Nichols FIA Investment Director, Multi-Asset Investing

January 2016

Issues in DecumulationCreating a portfolio for drawdown


Lifestyle DC – the evolving model

Savings & Growth accumulation

Savings & Growth accumulation

Preservation of annuity purchasing

powerAnnuity or drawdown

Decumulation(Income & Growth)

Annuity

The ‘old’ lifestyle model – specified retirement date

The Whole of Life model – a phased approach based on needs & requirements

Pre-retirement Post-retirement

What does the new model target? Maximum wealth, minimum shortfall?

14

Sequencing risk in decumulation….

Source: Standard Life Investments

0

100

200

300

400

500

600

Ou

tsta

nd

ing

fu

nd

s av

aila

ble

(£0

00s)

Years of retirement

1984-2013 1983-2012 1982-2011

• £100k passive equity investment

• Initial withdrawal 6% pa

• Inflation linked payments

• Variability in outcome caused by strength of returns in first few years of withdrawal

• Demonstrates the impact of volatility in decumulation

0 5 10 15 20 25 30 35 40


…moderates if accumulation and decumulation are joined-up


0

10

20

30

40

50

60

70

Ou

tsta

nd

ing

fu

nd

s av

aila

ble

(£0

00s)

Age

Saving for 30 years then decumulating - same % NAE

£21,897

£36,944

£29,054

1952 1953 1954

• Passive equity investment strategy, actual data used

• Contributions 9% of NAE, withdrawals 25% of NAE

• Variability of payment longevity much reduced

• Maintaining risk levels means that strong returns in late stage accumulation increase pot size substantially

• Helps mitigate the impact of less strong returns at the start of decumulation

• Analysis based on most recent complete 30 year data sets for interest rates and inflation

• Starting pot £100,000

• Average total 30 years payout £222,481

• Fund exhausted in 20 years or less 80% of the time

• Includes policy member fees (25bps)

Decumulation: The risk of risk-free investment

17Decumulation will involve investment risk

0

5

10

15

20

25

30

0

50

100

150

200

250

300

350

400

1951 1956 1961 1966 1971 1976 1981

Co

ho

rt p

aym

ent

life

tim

e (y

ears

)

To

tal p

aym

ents

ov

er p

aym

ent

lifet

ime

(£00

0s)

First year of 30 year payment

Cash in the bank:6% initial payment increasing with inflation

Cash total return Cash payment lengthCash payment duration



18

Growth assets: Perfect world

In theory, payments can be sustained for nearly 40 years

Out

stan

ding

fun

ds a

vaila

ble

(£00

0s)

0

20

40

60

80

100

120

140

160

3 8 13 18 23 28 33 38

£500* per month payout using smooth long term assumptions

Years since retirement

Assumptions p.a.Equity return 9.0%Inflation 3.5%Total paid out £492k

* Payments uplifted for inflationSource: Standard Life Investments

19

Growth assets: Real world

Out

stan

ding

fun

ds a

vaila

ble

(£00

0s)

0

200

400

600

800

1000

1200

3 8 13 18 23 28 33 38

smooth return 1951-1980 1961-1990 1971 - 2000

Years since retirement

The impact of volatility creates many different outcomes

1951-1980 p.a.Equity return 11.1%Inflation 6.9%30 year payout £433k





20Exposure to growth beneficial, but volatility needs to be managed

Growth assets vs Cash

0

5

10

15

20

25

30

35

0

200

400

600

800

1000

1200

1400

1600

1800

1951 1956 1961 1966 1971 1976 1981

Co

ho

rt p

aym

ent

life

tim

e (y

ears

)

To

tal p

aym

ents

ov

er p

aym

ent

lifet

ime

(£00

0s)


Passive Equity vs Cash6% initial payment increasing with inflation

Global equity total return Cash total return

global equity payment length Cash payment length

• Passive equity investment can improve the outcome, but is highly variable

• Fund exhausted within 20 years 40% of the time

• Fund exhausted in 10 years in worst outcome

• Average total 30 years payout £453,114

• Includes policy member fees (30bps)

Cash payment durationGlobal equity payment duration


Lower volatility growth vs passive equity

21

Outcome using reduced volatility equity justifies higher fee

• Low volatility growth produces better outcomes

• 27% improvement in total return on average vs passive equity

• 9% increase in longevity

• But funds still run out in 20 years 35% of the time

• Includes policy member fees (30bs global equity, 70bps reduced volatility)

0

5

10

15

20

25

30

35

0

200

400

600

800

1000

1200

1400

1600

1800

1951 1956 1961 1966 1971 1976 1981

Co

ho

rt p

aym

ent

life

tim

e (y

ears

)

To

tal p

aym

ents

ov

er p

aym

ent

lifet

ime

(£00

0s)


Lower vol vs Passive equity:6% initial payment increasing with inflation

Global equity total return Reduced volatility equity total return

global equity payment length Reduced volatility equity payment lengthGlobal equity payment duration


Reduced volatility equity payment duration


Low volatility – making my money last longer

Source: Standard Life Investments, tracker fees 0.1%, MAI Growth 0.6%

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Pro

bab

ility

of

Ru

in %

Years of payment

Tracker equity Multi-Asset growth

• £100k passive equity investment, initial withdrawal 6% p.a., inflation linked payments

• Data generated by stochastic model with 1000 simulations

• Re-produces the effect of the actual data

6% initial income inflation-protected

4.1 extra years

Extra years' payments given by reduced-volatility equityAllowance made for fees

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

• Multi-Asset growth increases longevity most when it is most needed

Withdrawal policy statements

• Sets policy in advance as to how investments and withdrawals will be managed

• Areas that can be covered include; Client income goals to be met via withdrawals

How assets will be invested to meet those goals

The initial withdrawal rate

The method for determining the source of each year’s income withdrawal

The method for determining withdrawal amounts in future years

• Examples include “Current and Bonus Account” model, pension payments vary with investment returns

Maximum withdrawal rate


1984-2013: Payout schedule

Over £300k paid out under this approach compared to £275k for level payment

Inco

me

per

year

0

2000

4000

6000

8000

10000

12000

14000

16000

18000current account bonus account

Regular expenditure

basic

Steady incomeHigh probability of payment

Regular expenditure discretionary

Variable incomeCapital growth and risk considerations

Instant access to capital

• Multi-asset growth investment strategy implemented alongside withdrawal policy statements

• Pension payments last for at least 30 years in all examples

• Average total payout over 30 years is £727,738

• Includes fees (30bs global equity, 70bps multi-asset growth)

Decumulation in action

Combined strategy to combat volatility produces the best outcome

0

5

10

15

20

25

30

35

0

200

400

600

800

1000

1200

1400

1600

1800

1951 1956 1961 1966 1971 1976 1981

Co

ho

rt p

aym

ent

life

tim

e (y

ears

)

To

tal p

aym

ents

ov

er p

aym

ent

lifet

ime

(£00

0s)


Capped, flexible payments, multi asset growth:6% initial payment increasing with inflation

Global equity total return Capped, flexible red'd vol total return

global equity payment length Capped, flexible red'd vol payment lengthCapped, flexible MAI Growth payment durationGlobal equity payment length


Capped, flexible MAI Growth total return


How can we generate a long term equity return with materially lower risk?

26

Source: Lipper, total returns, in € terms, 31 December 2014

Discrete Yearly Performance (%) by Market

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

55.03 25.30 26.07 -14.29 73.43 27.48 18.55 40.36 40.24 29.46

44.76 22.51 23.73 -21.61 71.56 26.65 10.88 21.34 26.67 27.89

39.44 20.45 6.15 -24.12 68.24 23.63 10.38 20.74 22.04 22.06

27.84 19.15 -3.39 -25.44 56.93 23.06 6.06 17.48 21.85 20.76

25.75 19.06 -3.43 -25.66 41.58 21.81 5.53 16.80 17.77 17.39

22.57 18.60 -4.85 -33.73 30.67 21.21 3.36 15.66 8.12 13.76

22.43 4.77 -5.00 -41.15 22.52 18.74 -0.97 14.42 3.29 11.80

20.89 3.58 -6.57 -42.25 17.62 18.71 -11.32 14.22 -0.83 9.63

16.91 2.69 -7.09 -46.77 11.19 11.77 -12.51 6.70 -1.92 8.46

12.08 2.56 -13.29 -49.12 9.58 11.16 -12.55 5.77 -3.02 7.78

11.21 1.56 -13.55 -50.75 7.54 9.66 -12.96 5.40 -6.35 7.37

5.85 -4.88 -24.71 -60.73 3.07 4.37 -15.44 3.79 -6.49 4.33

Global High Yield Bonds UK Equities UK Direct Property Cash

UK Investment Grade Bonds European Equities Asia Equities Ex Japan Japanese Equities

UK Gilts UK Small Cap Emerging Market Equities US Equities

Clients want consistency but markets deliver chaos

How regular is the cycle?

1982

1984

1986

1988

1990

1991

1994

1998

1999

2001

2002

2006

2007

2008

2009

2014

‐4

‐2

0

2

4

6

8

‐1 0 1 2 3 4 5 6 7

Inflation

Real GDP

Recession

Recovery Overheat

Stagflation


Buy portfolio insurance?

28

Historically you would have needed to pay 1.7% per quarter, on average, to cap losses at 5%

0

200

400

600

800

1000

1200

1400

1600

S&P 500 Total Return Index Protected index, no cost

Protected index allowing for costCash Return Index (3m rates)

Tail risk protection as many imagine it would be. Fantastic if it was affordable

2.2% p.a.

1800

Ret

urn

see

kin

g I

nve

stm

ent

risk

%

Use mixed asset portfolios?

• Use of predominantly growth-assets offers potential for reasonable returns

• Better diversification

• Lower risk

* Based on a DGF portfolio disclosed in the appendix of this presentation

Do growth-related assets offer genuine diversification potential?

UK Equity OverseasEquity

UKCorporate

bonds

Gilts Overseasbonds

UK Index-linked gilts

UK Property Total

Ret

urn

see

kin

g I

nve

stm

ent

Ris

k %

Limited diversification

Traditional balanced

Diversified Growth Fund*

Diversified Risk

29

• Most risk is concentrated in the Equity allocation

• Little diversification

• Return potential is materially lower due to the bond allocation

• Lower risk but also lower return


Source: IPD UK Monthly Property Index, All Property; Federal Reserve Trade-Weighted Exchange Value of US Dollar vs 6 Countries; Dow Jones UBS –Commodity Index; Barclays Capital Global Corporate Index, Excess Returns; Barclays Capital Emerging Markets Index, Excess Returns; Barclays Capital US High Yield Index, Excess Returns; Standard Life Investments, 31 December 2011

Unstable risk characteristics

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

PropertyFX

BasketCommodities

Corporate Bonds

EmergingMarket Bonds

High Yield Bonds

2000-2007 2008-2011

Correlation of Global Equities with other market sectors

30

Ret

urn

see

kin

g I

nve

stm

ent

risk

%

Enhanced-DiversificationA wider range of return seeking investments

• More return seeking risk

• Better diversification

• Lower risk

* Based on a DGF portfolio disclosed in the appendix of this presentation

Deploying investment risk across a diverse range of global markets

US Equity European equity UK Equity Japanese Equity Chinese Equity EM equity High Yield Credit Direct Property Global REITs Global Investment Grade US Dollar v CanadianDollar

European s teepener vs USflattener

Japanese vs KoreaEquities

US equity tech v small cap European short datedforward interest rates

US Dollar vs Euro Norwegian Krone vAustralian Dollar

UK v Swiss Equities German v French Equities Mexican Peso vsAustralian Dollar

Norwegian Krone vs Euro Australia vs UK interestrates

Enhanced Diversification Growth

Enhanced-Diversification strategies

US Equity European equity UK Equity Japanese Equity Chinese Equity EM equity High Yield Credit Direct Property Global REITs Global Investment Grade US Dollar v CanadianDollar

European s teepener vs USflattener

Japanese vs KoreaEquities

US equity tech v small cap European short datedforward interest rates

US Dollar vs Euro Norwegian Krone vAustralian Dollar

UK v Swiss Equities German v French Equities Mexican Peso vsAustralian Dollar

Norwegian Krone vs Euro Australia vs UK interestrates

Enhanced diversification

Market return assets

Reduced risk

Ret

urn

see

kin

g in

vest

men

t ri

sk %

UK Equity OverseasEquity

UKCorporate

bonds

Gilts Overseasbonds

UK Index-linked gilts

UK Property Total

Limited diversification

Traditional balanced

Diversified Growth Fund*

Diversified Risk

31


-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00US equity Chinese

equityUK Property High yield

creditEmerging

market debtEuro

corporatebonds

US equitytech v small

cap

AustralianInterestRates

US Dollar vEuro

Money making strategies and diversification

Source: Standard Life Investments, APT, 31 December 2014

Go the extra distance to find money-making ‘shock absorbers’

Sh

ock

ab

sorb

ing

po

ten

tial (

Co

rre

latio

n)

Enhanced-Diversification

Relative value

CurrenciesInterest

rates

Enhanced-Diversificationstrategies

Market return assets

32

7.6%

7.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Diversification benefits

Expected volatility

Enhanced-Diversification in action

• Equivalent global equity volatility 11.1%

• Total return seeking risk 132% of global equities

• Diversification benefits result in portfolio risk being c.64% of global equities

A risk-based portfolio example

Source: Standard Life Investments, APT, EDGF portfolio, 30 September 2015

Glo

bal

Eq

uit

y 11

.1%

Relative Value

Equities

Real Estate Credit

Equities

Currencies

Interest Rates

33


Historic stress scenariosHow would today’s portfolio fare?

* The reference index used for 'Black Monday' is "MSCI World (GBP)", as the MSCI ACWI index was not developed until 31 December 1987 Source: Standard Life Investments, Risk Metrics, EDGF portfolio, 30 September 2015

Reduced tail risk in stressed markets 34

-28 -26 -24 -22 -20 -18 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18

Black Monday 1987

Gulf War 1990

Rate Rise 1994

Mexican Crisis 1995

Asian Crisis 1997

Russian/LTCM

Tech Wreck (April 07 - 14, 2000)

Sept 11th

Equity Sell-Off (August 23 - October 09, 2002)

Equity Rally (October 10 - November 27, 2002)

Gulf War 2 (March 01 - 23, 2003)

Bond Rally (May 01 - June 13, 2003)

Bond Sell-Off (June 14 - July 31, 2003)

Emerging Market Sell-Off 2006 (May 01 - June 08, 2006)

Subprime Debacle 2007 (July 15 - August 15, 2007)

Bank Meltdown 2008 (September 12 - October 15, 2008)

Euro Crisis (July 22 - August 23, 2011)

QE jitters (May 22 - June 24, 2013)

% Move

MSCI ACWI (GBP)* EDGF

Many further issues to consider

• Economy - price, spending less

• Efficiency - use of resources, spending well

• Effectiveness - actual vs intended outcome, spending wisely

• Equity - outcome distribution, spending fairly

How to assess this in a decumulation context?

35

• Complexity / communication / advice

• Composure

• Capability

• Cost - Value for Members Framework (NAO)


Appendices

DGF portfolio

Source: Standard Life Investments, Global Equities (unhedged)

Asset group Group weight Asset class Weighting

Equities 45% Global Equities (unhedged) 40%

Emerging market equities 4%

Private equity 1%

Bonds26% Global bonds 8%

Global credit 10%

Emerging market debt 5%

Index-linked bonds 3%

Alternatives 29% Commodities 14%

Property 10%

Hedge funds 5%

0% Cash 0%

100% 100%

37


The information shown relates to the past. Past performance is not a guide to the future. The value of investment can go down as well as up.

Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use by Standard Life**. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner Standard Life** or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of future results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

**Standard Life means the relevant member of the Standard Life group, being Standard Life plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time."

Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL.

Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority.

Calls may be monitored and/or recorded to protect both you and us and help with our training.

www.standardlifeinvestments.com

© 2014 Standard Life, images reproduced under licence

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