Novel solutions as pension provision shifts to do-it-yourself

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Target-date funds match a variety of investment horizons and individual long-term needs

  • Collective pension provision is gradually being unwound as the financing of retirement is shifting from companies and governments to individuals
  • A new generation of target-date funds offers innovative solutions

Increasingly, budget austerity means the replacement rate[1] covered by so-called first pillar state systems is being cut and the shortfall is expected to be made up by second pillar occupational schemes and third pillar personal pension savings. This means investment risk is being transferred to the employee. Employee investment-risk awareness and risk tolerance have become essential issues for retirement plan managers to get to grips with.

A further challenge is the current investment climate: low interest rates are making it harder for an (pension fund) investor with a medium to long-term investment horizon to protect and grow his capital.

Offering cutting-edge solutions

The changes create opportunities for asset managers to service pension funds’ needs in fiduciary management, liability-driven investing (LDI) and risk overlay management. Target-date funds have been popular for some time in defined-contribution schemes, which are increasingly replacing the defined-benefit schemes that were traditionally at the heart of the first and second pillars.

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Modern tailor-made target-date funds combine portfolios seeking to protect capital and performance portfolios. The composition of the mix typically shifts along a glide-path which can be time-dependent: the closer an investor is to his retirement date, the higher will be the share invested in the ‘protection’ portfolio. The allocation to the mix can also be adjusted over time in order to meet investment goals.

Innovative target-date funds match a variety of investment horizons and individual long-term savings needs. Each fund can benefit from a guaranteed minimum net asset value at maturity. In our approach, this can only go up over the life of the fund. How does this work? Every day, a current protection ratio is calculated. If this is higher than the previous (business) day’s value, it will be adopted; otherwise, the previous one is kept.

We believe such innovative solutions can help place investors ahead of the curve in the current transformation of the pension landscape.

[1] The percentage of pre-retirement income paid out upon retirement

Alain Jaques

Product Strategy Manager, Retirement Specialist

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