Delivering retirement clients successful, risk-managed investment solutions

Managing investment risks in retirement 

As advisers, securing your clients a sustainable income throughout retirement is paramount.

Yet today’s investment landscape is complex. Increased market volatility and the return of structural inflationary pressure point to shorter business cycles and pose new challenges to traditional retirement strategies. Today, managing downside risk is now as important as managing returns.

Unsurprisingly, leaving a pension pot entirely in cash is unlikely to generate enough return to sustain a reliable income. Instead, an actively managed, multi asset investment option offers the opportunity for better risk-adjusted returns and lower peak-to-trough losses.

Retirement brings new investment risks requiring careful management. During accumulation, regular contributions achieve the benefits of pound cost averaging. Pound cost averaging helps smooth out market ups and downs, with the regular contributions meaning you keep investing whether prices are low or high. This aims to average out investment costs over time.

Yet once clients retire and enter the decumulation phase, they’re exposed to sequencing risk – the danger that large withdrawals during downturns can irreparably diminish their pension pot. 

Sequencing risk: the critical challenge 

Sequencing risk is one of the most significant threats to retirement income. Early investment losses, combined with withdrawals, can drastically reduce the longevity of a client’s pension pot.

The asset management industry has decades of experience designing and managing portfolios for accumulation. However, there are distinct investment challenges faced by people withdrawing money from their pension that still go unaddressed.

For clients, the freedom to choose their investment strategy for accumulation already comes with responsibility. But flexible withdrawals take things one step further, asking retirees to choose both their investment strategy and their income withdrawal strategy.

In an uncertain world, minimising sequencing risk could make a meaningful contribution to the lives of millions of people relying on drawing down a pension pot in retirement.

The impact of sequencing risk 

This illustration shows two investments with the same long-run average return. One has a flat return profile. The other graph offers an example of a variable profile with large losses in the first three years followed by higher returns later that make up lost ground.

We’ve designed these scenarios so that, in either case, a buy-and-hold strategy would end up in the same place at the end of a 20-year period. Yet when taking an income, the outcomes vary markedly.

The pension pot with flat returns of 5% a year retains around 30% of its initial value after 20 years of withdrawals. Meanwhile, even with higher returns later, the pension pot with poor initial returns never recovers from its early losses. In just 12 to 13 years, it’s completely depleted.

Clearly, a good retirement solution needs to not only achieve an attractive level of return but also manage peak-to-trough losses along the way. 

Active multi asset management: the GRIPS advantage

Part of our Governed Range, we’ve designed our Governed Retirement Income Portfolios (GRIPs) to deliver a sustainable retirement income by balancing growth opportunities with risk management. The aim is to help insulate your clients against market shocks while they’re withdrawing from their pension, minimising the impact of sequencing risk.

The GRIPs aim to achieve this with a multi asset approach, blending equities, bonds and other assets. This is combined with active management of downside risk. Together, these features are designed to deliver a sustainable income even during turbulent market periods.

Find out more in our GRIPS adviser guide. 

Modern retirement needs modern retirement solutions

Clearly, any retirement solution must focus on long-term growth and downside risk management in roughly equal measure to be fit for modern retirement.

While multi asset investing can improve the risk/return trade-off, limiting the worst outcomes, passive investing or chasing assets offering high natural income can leave clients exposed to large losses.

Retirement investment offerings are still in their infancy, but they’re the urgent, unfinished business of pension freedoms. If we’re in a more inflation-prone world, we should expect more years like 2022, when negative stock and bond returns coincided with increased drawdown needs.  

The impact of recessions and bear markets 

Today’s retirees are likely to live through more business cycles than previous generations. Each of these will bring market turbulence.

We’ve experienced some abnormally long business cycles since 1980, with low inflation allowing central banks to cut interest rates early and hike them late. Structural changes in recent years – including deglobalisation, a chronic underinvestment in commodity capacity and geopolitical risk – have increased the likelihood of more frequent inflationary overshoots.

This suggests we’ll see more frequent recessions as central banks are forced to step in to create spare capacity in the economy and bring prices down. It’s worth remembering that the average full business cycle, based on US economic data from the 1860s until 2020, lasts about five years, with the average economic expansion lasting just over three years.

Why choose Royal London’s GRIPs for your clients? 

Royal London’s GRIPs offer a sophisticated, actively managed solution for retirement investing.

By focusing equally on growth and downside risk management, we’ve designed our GRIPs to help you deliver better, more consistent client outcomes.

In a world where inflation and market volatility are likely to remain elevated, GRIPs are designed to offer the flexibility, resilience and sustainability needed for modern retirement planning.

Unlike passive balanced funds, GRIPs actively manage asset allocation, responding to market conditions to support long-term sustainable income.  

Benefits for clients

Our GRIPs offer your clients several distinct advantages: 

• Sustainable income: Designed with regular income withdrawals in mind, GRIPs aim to reduce the risk of your clients running out of money – which they raise as a key concern – even over long retirement horizons.
• Downside risk management: This active approach aims to minimise the impact of bear markets and help protect clients during recessions and periods of high inflation.
• Diversification: GRIPs invest across a broad spectrum of asset classes, further insulating clients from the risks associated with any single market or sector. 

Benefits for you 

We offer guides, factsheets and performance reports that can help you explain the benefits of GRIPs to your clients. These materials can help you start meaningful conversations with your clients about the importance of investing in retirement and the risks of keeping funds in cash.