Income sustainability scores now updated – Q1 2021

14 June 2021



Every quarter, our drawdown governance service (DGS) calculates a new income sustainability score for your clients, based on what's happening in the market.

Q1 in review

The income sustainability scores for Q1 2021 have now gone live. Here’s an update on what’s changed.

March 2021 concluded with positive signs of recovery post-pandemic, where we saw lockdowns begin to ease and many countries make strong developments in their vaccination programmes.

Recovery was translated to UK and US equity markets over the quarter, although the US were provided with an additional boost with the confirmation of a third major stimulus package. The stimulus check includes individual relief payments to US citizens, payments to local governments, schools and additional support for COVID-19 testing and vaccine distribution. The final day of the quarter also saw President Biden sign a $2 trillion plan to improve the nation’s infrastructure and shift towards a greener future.

US policies have benefited value stocks this quarter, where energy and financials were highest performing sectors over the quarter. 2020’s booming growth stocks struggled, with the technology sector as the lowest performer.

Although global government support has led to a positive outlook on economic growth, increased consumer spending has heightened future expectations of inflation over the quarter. As a result, major investors sold global government bonds causing yields to rise across all bond terms. 10-year US treasuries saw an increase in yields bringing rates back up to pre-pandemic levels, whilst UK Gilts also saw increases in yields relative to the nation’s own expectations of future inflation.

The diversified nature of the Governed Range provides some level of immunity to extreme impacts resulting from market volatility. In addition, RLAMs overweight position in equities and commodities may provide some protection against some of the lower performing fixed income assets.

Although there are signs of global recovery, it’s worth noting that uncertainty remains. The threat of a third wave is likely to keep markets on their toes whilst the race for vaccination continues. The significant market volatility we’ve seen through 2020 has highlighted the importance of tools like the drawdown governance service in supporting client conversations about the long-term sustainability of their income plans and investment choices. It may also  highlight  the  need to re-evaluate client risk appetite and capacity for loss. Our risk profiling and income modelling tools mean we are well placed to support our customers and advisers in this area.

Model update

The forward-looking assumptions for Q1 show higher expected returns across most asset classes over the short and long term, where customers are likely to see a slight increase in their future expected fund values. As short and longer-term yields have increased this quarter, we’d expect annuity rates to better in line with this, providing more affordability for customers looking to take an annuity.

Other changes this quarter include an update to our Governed Range Strategic Asset Allocations (SAA’s), as well as a shift in our equity benchmark. The change in SAA’s have led to a more optimal position for these portfolios where we should see better outcomes for our customers.

Our equity benchmark change involves being more exposed to Global and Emerging markets and less exposed to UK markets, which has increased future expected returns. This will also contribute to a further increase in future fund values for investors.

How are ratings calculated?

Here’s a reminder of how the income sustainability scores are calculated on DGS:

  1. Nominated sustainability score – what is the customer’s score relative to their nominated ‘target’?
  2. Investment performance – have the customer’s investments outperformed inflation?
  3. Annuity rates – how have market annuity rates changed?
  4. Income plan – has the customer taken more or less income than initially discussed with their adviser?

These factors work together every quarter alongside the Moody’s assumptions to give customers an idea of whether their income sustainability is still on track or needs some attention.

Setting a reasonable income relative to the customer’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 help drive discussions when planning an income through retirement.

The underlying assumptions for the financial planning tool have also been updated this quarter.

So, what does this mean for the DGS and customer sustainability scores?

We expect the combination of the positive recovery, change in SAAs and equity benchmark to increase income sustainability scores for many of our customers, dependent on their recent withdrawal activity. The increase in yields this quarter should link to more favourable annuity rates for our Income for life (drawdown then annuity purchase) customers, making annuity purchases slightly more affordable and therefore resulting in a further increase in sustainability scores.

Our house view

Our ‘house view’ represents our current opinion on what would be a sustainable level of income for someone aged 65 just starting out in drawdown. Just starting out in drawdown is important here as the house view doesn’t capture the impact of recent market turmoil on retirement savings values and assumes that the individual is looking to use the savings they have to start drawdown over 25 years, investing in GRIP 3 with a yearly charge of 1%.  This quarter we haven’t adjusted our view, so we continue to believe that 3.5% income over 25 years is highly sustainable.

Our current view is that a 3.5% withdrawal rate is highly sustainable.

This may seem low, but the value of the drawdown governance service is its ability to provide visualisation on the impact of not just current market conditions, but also fund performance and actual customer income levels on sustainability scores. Ideally, this means customers and advisers can responsibly adjust income levels to reflect the wider economic environment and ensure they maximise the likelihood of sustaining income throughout retirement or until annuity purchase.


Listen to our latest market commentary podcast

The pandemic, strategic asset allocation changes and the impact on income sustainability scores.

Find out more

Log in to our drawdown governance service now to see if your clients’ income sustainability scores have changed.

If you don’t already use the service, visit the drawdown governance service webpage to find out how it can help you track, discuss and manage the ongoing sustainability of your clients’ income.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.