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Drawdown governance service - Q4 2024 update to income sustainability scores
Income sustainability scores for Q4 2024 have now gone live for our Drawdown governance service. This quarter customers should see similar or lower sustainability scores following our calibration update and market movements experienced since the last update in August. The figures below have been produced using assumptions as at end September 2024.
Market review over the last quarter
Watch Trevor Greetham’s multi asset quarterly update which can be found in RLAMs videos and webinars section for insight into market performance over the last quarter.
Drawdown governance service (DGS) model update
This quarter’s model calibration shows a decrease in returns across most asset classes which reduces the expectations of customers meeting their income targets in the short, medium, and long term. However, the performance of our Governed Retirement Income Portfolios has provided small positive returns since the last update.
Annuity rates have risen since the last quarter, and they remain at high levels which increases the buying power for our Income for Life (customers taking drawdown then purchasing an annuity). This will be translated through higher scores for these customers in comparison to our Income to Age customers.
The graph below highlights how average annuity rates have varied in relation to the performance of the GRIPs since launch. This relationship is important as it can directly impact a customer’s income sustainability, depending on their investment target*:
*Source: Lipper, Royal London, as at 01/11/2024. How investments have performed in the past does not tell you anything about how they might do in the future. Prices could rise, but they can fall too, so customers may get back less than they started with.
Our houseview
Our ‘houseview’ represents our current opinion on what would be a sustainable level of income for someone aged 65 just starting out in drawdown. Note that our houseview doesn’t capture the impact of recent market turmoil on the value of pension savings and assumes that the individual is just starting out in drawdown, investing in GRIP 3 with a yearly charge of 1%.
This quarter we retain our houseview that a 5% nominal withdrawal rate is highly sustainable. We will continue to monitor and update our houseview as the economic backdrop evolves.
The value of the DGS is its ability to provide visualisation on the impact of not just current market conditions, but also fund performance and actual client income levels on sustainability scores. Ideally, this means you and your clients can responsibly adjust income levels to reflect the wider economic environment and ensure you maximise the likelihood of sustaining income throughout retirement or until annuity purchase.
A reminder of how the DGS ratings are calculated
The income sustainability scores take into account:
- Nominated sustainability score – what’s the customer’s score relative to their nominated ‘target’?
- Investment performance – have the customer’s investments outperformed inflation?
- Annuity rates – how have market annuity rates changed?
- Income plan – has the customer taken more or less income than initially discussed with you?
These factors work together every quarter alongside the Moody’s Analytics assumptions to give your clients an idea of whether their income sustainability is still on track or needs some attention.
Setting a reasonable income relative to your client’s investments is one of the key aspects of investing through drawdown. Our financial planning tool is useful in helping model different income scenarios and helping drive discussions when planning an income through retirement.
The underlying assumptions for the financial planning tool have also been updated this quarter.