Cen­tury of change in just two decades

Irish Examiner - Supplement - - PENSIONS - Bernard Walsh Bernard Walsh, Head of Pen­sions and In­vest­ments, Bank of Ire­land In­vest­ment Mar­kets

When I look at how the pen­sions land­scape has evolved in re­cent decades, we have prob­a­bly ex­pe­ri­enced more change in the last 20 years than in the pre­vi­ous 100.

With that in mind, it is vi­tal that if you keep up to date with th­ese changes and how they might im­pact you.

One of the big pluses is that you have far more choice to­day than you would have had in the past. It is in the field of in­vest­ment where we have seen ma­jor change.

Tra­di­tion­ally, many of those who save for retirement would have put their money in a man­aged fund that of­fered a rea­son­able mix between shares bonds, prop­erty and cash.

What caught out many back in 2008/09 was the re­al­i­sa­tion that funds like this of­ten had a min­i­mum level of eq­ui­ties that they must hold, ir re­spec­tive of how mar­kets are per­form­ing.

In re­cent years, we saw more peo­ple adopt­ing the “life­style” or “Tar­get Date” ap­proach. Un­der this strat­egy, it means that your money is au­to­mat­i­cally switched from higher to lower risk as­sets, typ­i­cally start­ing from about 15 years from retirement.

An­other ma­jor change has seen the ris­ing pop­u­lar­ity of pas­sive in­vest­ing. This is where de­ci­sions on the in­vest­ment of your money is linked to the make- up of a stock mar­ket in­dex such as the FT SE 100. If a share makes up 1.5% of the in­dex, then 1.5% is used to pur­chase that share.

The op­po­site ap­proach is ac­tive in­vest­ing where your money is al­lo­cated us­ing the re­search ca­pa­bil­i­ties and in­vest­ment skills of fund man­agers. Pas­sive in­vest­ing has grown hugely in pop­u­lar­ity due its con­sis­tency in per­for­mance, trans­parency and of­ten lower cost.

An­other in­no­va­tion in in­vest­ing is the in­creased fo­cus on risk man­age­ment.

Up to now, risk was man­aged by en­sur­ing that there was broad di­ver­si­fi­ca­tion of your fund, mean­ing that no one share, sec­tor or as­set class could in­di­vid­u­ally cause the value of your hold­ings to fall sub­stan­tially.

In ad­di­tion to di­ver­si­fi­ca­tion, we have added “Tar­get Volatil­ity strate­gies ”. Us­ing this ap­proach, our Prime Funds al­lo­cate money across over 5,000 shares and a wide suite of prop­erty, bonds and cash. In ad­di­tion, if mar­kets be­come more ner­vous, or volatile, the amount held in shares is au­to­mat­i­cally re­duced.

As mar­kets be­come calmer, the amount held in shares in­creases sub­ject to max­i­mum amounts which are dic­tated by your stated at­ti­tude to risk.

This ap­proach has proven its value dur­ing more some of the re­cent bouts of stock mar­ket dis­rup­tion.

The key ques­tion is, with all of this in­no­va­tion that we have wit­nessed, what is the best so­lu­tion? A key con­trib­u­tor to an­swer­ing this is to start with the end goal in mind. The in­vest­ment of your money must re­flect what you want at retirement and on how you want to draw down your ben­e­fits.

Again, you have more choice now than you would have had in the past.

The tra­di­tional ap­proach was that you would draw down 1.5 times your fi­nal salary as a tax- free lump sum, so long as you have achieved suf­fi­cient ser­vice.

The re­main­der was used to buy a guar­an­teed in­come for life.

The chal­lenge in re­cent years is that the rate at which you can buy this in­come or the “an­nu­ity rate” has fallen. In other words, you need a big­ger pot of money to en­sure you can buy an ad­e­quate in­come.

The rea­son why an­nu­ity rates have de­clined is due to fall­ing govern­ment bond yields and even more im- por­tantly, be­cause peo­ple are liv­ing a lot longer.

At Bank of Ire­land, we find that only those that have no other choice are go­ing down this route.

If you are se­lect­ing this ap­proach, it is im­por­tant that as you near your retirement age that your money is moved to cash and bonds in a pro­por­tion that re­flects how much tax free cash you qual­ify to draw down.

The al­ter­na­tive ap­proach is to draw down 25% of your fund tax- free and then use the re­main­der to in­vest in an Ap­proved Retirement Fund (ARF).

You can select how you want your money in­vested. It is im­por­tant, for ex­am­ple, if you are 55 and plan­ning to re­tire at 65 and use the ARF ap­proach, that you recog­nise that your in­vest­ment hori­zon is not 10 years. It could be 30 years or more.

You do not have a guar­an­teed in­come for life so it is im­por­tant that your ARF is achiev­ing a higher level of growth than what you are draw­ing out of the fund.

While of f icial sta­tis­tics put in­fla­tion at a neg­li­gi­ble level, we know in re­al­ity that cer­tain costs es­ca­late in retirement, par­tic­u­larly those as­so­ci­ated with health­care.

This is the time of the year that many in­di­vid­u­als sit down with use to dis­cuss this vi­tally im­por­tant sub­ject of help­ing you to achieve a de­cent in­come in retirement. You need to see is what you have on track and is it fit for pur­pose.

Is your money in an older style con­tract that may be ex­pen­sive with a higher charg­ing struc­ture than you can avail of to­day?

Does the strat­egy you are us­ing to­day re­flect the op­tions that you want to avail of when you reach retirement age? A big ad­van­tage for our cus­tomers is that they can read­ily keep in touch with what they have through Life On­line. Ev­ery time they log onto on­line bank­ing at Bank­ing 365, they can see an up to date val­u­a­tion of their funds.

The pen­sions land­scape has evolved and it will con­tinue to see fur­ther change.

The ESRI pre­dicts the age at which you get the state pen­sion will move to 70. The key to en­sur­ing that you don’t get any neg­a­tive sur­prises when you reach retirement age is to get re­ally good qual­ity ad­vice now and on an on­go­ing ba­sis.

Pen­sions have seen dra­matic changes for to­day’s work­ers, in some cases tak­ing pre­vi­ous gen­er­a­tions com­pletely by sur­prise.

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