Pension drawdown masterclass
For an audience comprised of insurance-company pension professionals, SIPP providers, advisers and actuaries, Stuart explained how Fowler Drew manages one of the most critical of all tasks: living off capital in retirement. Defining the problem first as an economic one, he showed how poorly suited is the conventional approach of ‘balanced management’ to such a complex, multi-faceted and idiosyncratic task. Of all the personal financial goals, meeting retirement spending objectives in a controlled way is both vital to individuals and important for society. We are living too long to rely on level annuties yet cannot afford index linked annuities, so we have to continue to take investment risk through much of our retirement. We therefore need a robust solution, soon.
Demonstrating how Fowler Drew uses technology to solve the problem of deep customisation (applying principles of Liability Driven Investment, managing entirely by computer models and implementing using low-cost, basic investment building blocks), Stuart posed open questions about how the financial services industry might develop scaled-up, mass-market applications of this kind of approach, either as a service or as the basis of a packaged product.
In discussion, issues raised included:
FSA attitudes to the use of stochastic modelling to project quantified outcomes and reliance on those to identify ‘true’ risk preferences.
How to test for performance of different approaches when some are rules-based (quantitative models) and others haphazard (using judgement to adapt drawdown rates to changing fund values or GAD rules).
The lack of relevance of the prescribed ‘critical yield information’.