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Punter Southall Aspire urges employers to check their default DC pension funds, as new reports show variations that put savers at risk



Punter Southall Aspire urges employers to check their default DC pension funds, as new reports show variations that put savers at risk

Punter Southall Aspire reveals DC platform providers’ default funds vary significantly on benchmarks, allocation and risk at both growth & consolidation phases


Many companies assume their default DC pension funds are standardised across the industry, but new reports from Punter Southall Aspirea major investment and savings business, reveal this is far from the case and urge Employers to monitor their pension funds’ performance more closely.

The two reports, ‘Who’s performing well?’ examined nine major DC pension provider’s default pension funds both in their growth phase and at their consolidation phase (as of 31st March 2018).  Huge variations in outcomes were revealed.

During the growth and consolidation phases, funds vary in design and construction, investment risk and volatility, asset allocation strategy, return benchmarks, management and critically, performance. Furthermore, providers’ defaults have adopted different ‘glidepaths’ towards retirement which impacts overall performance and results.

Steve Butler, Chief Executive, Punter Southall Aspire, said: “Over the last nine months the global asset markets have changed, with high positive returns much harder to come by and volatility rising. Members need a solid saving and investing path, and this means selecting strategies with good fund diversification and the “wise” use of active management to enhance returns and achieve a financially secure retirement.

“This is our third report into DC default pension funds and again, we’re seeing wide variations, which may surprise some employers. Employers have a duty to actively manage their funds and regularly check their performance as they could be unwittingly putting their employees’ pension pots in jeopardy.”

What is happening in the growth phase?

Most of the default funds sit within an Assets under Management range of approximately £600m and £13bn, depending mainly on their launch date.

The report found the allocation to equities, bonds and other asset classes varies dramatically between the default funds, depending mainly on the targeted risk levels and the range of investment tools used.

In the broadest terms, those providers (Royal London, Standard Life, Fidelity, Aviva, Legal & General) who have their own asset management arm have developed the more diversified and sophisticated default offerings.

In general, the growth phase of the average default option is designed with significant exposure to equities to maximise growth. The average allocation to equities amongst the defaults was around 66%, with Scottish Widows’ default having the highest exposure at 84%, while Legal & General and Standard Life’s have both the lowest exposure at 44% approximately of their total asset allocation.

Default options also hold a significant portion of Fixed Income, allocating 27% on average to this asset class. Legal & General and Fidelity have the highest allocation with 47% and 37% respectively, while Royal London has no exposure at all.

Over the last three years, the Zurich fund was the best performer (7.3%), although on a relatively higher level of risk (9.5%) compared to the other defaults, which is no surprise given the levels of equity within the fund (77% equities).  In the same period, Standard Life produced the worst return (3.5%), but it does exhibit a consistently lower level of risk (5.3%) than all the default funds.

These figures highlight the wide performance spread amongst the top and bottom performers, indicating the significance of the asset allocation in the growth phase to maximise members’ fund values.

The timing of when the growth phase period ends, with assets moving gradually to lower risk assets, also differs significantly amongst all the providers. The duration of the growth phase could have a significant impact on members’ fund values.

The longer the period it provides members with more chance of creating higher fund values at retirement, but also less downside protection as they get closer to retirement.

What is happening to funds at the consolidation phase report?


The analysis is broken down into two periods of time, 5 years before retirement and at retirement, and uses the underlying fund allocation of the default strategies during those time periods to assess how well they align with their retirement objectives and to establish if they still provide efficient growth (relative to the level of risk taken) at the different glidepath stages.

Looking at portfolios 5 years before retirement and ‘at retirement’, for some providers (Zurich, Royal London, Fidelity) not all the underlying funds (of their default solution) had a 3-year track record as at Q1 2018.

5 years before retirement: amongst the rest, Legal & General’s fund was the best performer (6.6%), although at a relatively higher level of risk (7.2%) compared to the other defaults. Standard Life produced the worst return (2.7%), relative to the risk taken (5%). In terms of risk-adjusted performance, Legal & General have the highest Information Ratio (0.40).

‘At retirement’: amongst the rest, Legal & General was the best performer (6.6%), although at a relatively higher level of risk (7.2%) compared to the other defaults. Aviva (My Future) produced the worst return (1%), relative to the risk taken (4%). In terms of risk-adjusted performance, Legal & General have the highest information ratio (0.67).

The only similarity across all providers in their equity glidepath is that the allocation to equities tends to decline as members approach retirement. However, the initial allocations, the changes to allocation and the ‘at retirement’ allocation are different for almost every default strategy and depend mainly on the risk levels being targeted and the range of investment tools used.

Conversely, the overall bond allocation tends to increase closer to retirement for most of the default solutions.

For ‘5 years before retirement’ portfolios the average allocation to equities amongst the defaults at this stage of the consolidation phase was around 43%, with Fidelity’s default having the highest exposure at 58%, while Royal London has the lowest exposure at approximately 32% of their total asset allocations.

On the fixed income side, default options allocate 47% on average to this asset class, with Aviva (My Future) and Scottish Widows having the highest allocation with 65% and 60% respectively.

The average percentage of the overall allocation to alternative investments within the default funds is almost 7%, with Royal London (30%) and Standard Life (18%) placing the highest weights.

For the ‘at retirement’ portfolios, the average allocation to equities amongst the defaults at this stage of the consolidation phase was around 25%, with Legal & General’s default having the highest exposure at 45%.

On the fixed income side, default options allocate 52% on average to this asset class, with Aviva (My Future) and Scottish Widows having the highest allocations with 81% and 75% respectively. The average percentage of the overall allocation to alternative investments within the default funds is almost 6%, with Royal London (25%) and Standard Life (11%) placing the highest weights.

Finally, when it comes to fees (both growth and consolidation phase) even if charges vary from scheme to scheme they remain crucial in the final outcome of each default strategy, as they affect members’ fund values and subsequently members’ available income at retirement.

The more diversified and sophisticated the default option, the higher the total cost. Therefore, providers need to ensure consistent performance and efficient protection from market volatility to create value for money and justify the higher fees.

Steve Butler, Chief Executive, Punter Southall Aspire, adds: “Default doesn’t mean standard. With so many variations employers need to examine all aspects of their DC default fund carefully to understand exactly what they are getting and how their funds are performing.

“We urge employers to do more research, ask more questions and get advice from experts before they make investment decisions. They must also review the management and performance of their funds regularly to ensure that at retirement, their employees get the best pension and retirement possible.”


Revitalising the token market



Revitalising the token market 1

By Gavin Smith, CEO at Panxora

With interest rates near zero and fears that whipsawing stock markets are set for further plunges, many investors are turning to alternative markets in the search for returns. Money flowing into cryptocurrency hedge funds and trusts like Grayscale is at all-time highs and the large cap coins seem to be entering a bull phase, but that capital is not trickling down into new token projects. Why are blockchain token projects struggling to attract funding?

Seed investor scepticism

Setting aside the reputational issues with mainstream investors, even those educated in blockchain tech are not signing on the dotted line. This is certainly due in part to the hangover from the early token market.

During the heady days of 2016/17, investors could buy tokens during the token sale, and if the project was legitimate – even if the business case wasn’t particularly strong – prices would soar based on market enthusiasm. Early investors purchased at a discount and cashed out almost immediately for a handsome profit – and then repeated the process again. The token sale allowed founders to amass a war chest large enough to finance the entire token project – without having to give up a large chunk of company equity. Everyone got what they needed out of the deal.

Running a token sale is far more expensive today than it was during the boom. Getting the attention of the token buying public in a market where advertorial has replaced editorial is expensive. This coupled with a regulatory framework that requires the advice of accountants, solicitors and information gathering of KYC details for investors all comes with an escalating price tag.

To accommodate the change in cost structure, tokens now need to acquire funding in two rounds. Frequently there is a first round where capital is raised from a few, large investors. This cash is then used to finance setup and marketing the main token sale. The token sale, in turn, provides the capital needed to run the entire business project.

Bridging the gap between token projects’ needs and early stage investors

To successfully get a token through the capital raising process, founders must acknowledge the risk assumed by those very early investors and reward them appropriately. And given that tokens may stagnate or fall in price post token sale means that a deep discount in token price is not necessarily attractive enough to get investors to commit.

Many tokens have turned to offering equity in the business in the effort to raise that first tranche of capital. If you look at the number of successfully concluded token sales, the downward trend has continued since Q2 2018, so offering equity is not sufficiently stimulating the market.

Two sides of the coin

So, what is the answer? It’s a complex question but one thing is certain. Any solution must be rooted in a deep understanding of what both parties need to successfully conclude the deal.

Gavin Smith

Gavin Smith

On the one hand, token founders’ needs are clear: they need enough capital to get the token ready for and through a successful liquidity event that will provide sufficient funds to build the project. The challenge lies in striking the right balance between accruing that capital and making sure not to offer so much project equity that give up either the control or the incentive founders need to drive the project forward.

On the other hand, while the needs of the seed capital investors are more complex, there are two areas of key concern: transparency and profit incentives.

Transparency can mean many things, but almost always includes providing more informative cost and profit projections, as well as answers to a whole range of questions, not least the following:

  • What happens to investor capital if the token sale event fails? Token founders must be transparent from the outset. The token market is highly speculative and early investors run the risk of losing their money should the project fail. Therefore, investors require a well-established fund governance process in place throughout the fundraising so they can make informed decisions on whether the project is worthwhile.
  • How are the assets for the entire project managed? Investors need to know that their money is in good hands and that proper treasury management techniques are being used to manage cryptocurrency volatility risk. Ideally, an independent custodian will be used to hold the funds and limit founders’ ability to draw down the capital – releasing funds to an agreed-upon schedule of milestones.
  • How are the rights of investors protected, for instance in the case of a trade sale? Investors need to know what happens if the company they are investing in is sold. What impact could this have on the value of their stake? Would a separate governance framework need to be established? These are critical questions and investors aren’t likely to settle for any ambiguity in the answers.

Profit incentives are important when it comes to encouraging early participation in a project. Investors need convincing that the proposition will keep risks to a minimum and focus on providing a strong probability of a return. This means that founders need to be able to defend the case for the increase in the value of their token.

But this isn’t the only incentive that matters. Investors can also be incentivised by preferential offerings such as early access to projects and services that might help their own business.

Let’s not forget that investors don’t support just any project. What really matters is that there is something special and unique about the business being underwritten by the token. Preferably something that could be shared upfront and directly benefit the investor – proof that the investment is really worth it.

And that’s what it all comes down to. Ultimately, while token projects are having a hard time finding funds at the moment, if they can prove their worth and provide full transparency and clear profit incentives to ease investors’ concerns, the money is out there. And deals can be done.

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Achieving steady returns in challenging times for later life planning



Achieving steady returns in challenging times for later life planning 2

By Matt Dickens, Senior Business Development Director at Ingenious

The macro-economic conditions of the last five years have presented a relentless challenge for money managers seeking to produce consistent returns. It seems an all too distant memory that UK markets were caught in a happy period of low volatility and positive growth since the recovery from the financial crisis started in 2009. Enter 2016 and we have since found ourselves in an era of exceptional uncertainty. An acrimonious Brexit referendum and the following ambiguity, pressure on sterling, repeated challenges to the UK Government, a trade war between two of the world’s super-powers and now a global pandemic. All this as the world is going through a digital revolution.

Under these exceptional conditions, many investment strategies have understandably struggled to sustain the growth that investors had previously enjoyed without taking on elevated levels of risk and experiencing greater volatility and its associated negative impact. However, Ingenious Estate Planning has been operating alternative investment strategies for several years, which have produced a steady return with low volatility over this time as they possess little correlation to the main listed markets.

Real Estate

The affordable end of the UK’s residential real estate market has proven to be extremely robust during the recent uncertainty. The market benefits from some core fundamentals that have assisted it withstanding a lot of the pressures experienced by other sectors. Firstly, a large and sustained supply deficit. In 2018 the UK built 80,000 fewer houses than the actual requirement of 300,0001. This strong, inherent demand poses a clear investment opportunity to investors who can fund construction projects in the safe knowledge that there is an established demand on completion.

Secondly, this supply deficit has been recognised by Governments for several years and there has been a raft of policies enacted, all supportive of building more houses. For instance, the Help to Buy scheme has enabled many, often first-time buyers onto the property ladder. This scheme means there is a well-established and subsidised group of buyers ready to buy whenever developers complete construction. Thirdly, and more recently, the Government has acted quickly to identify the property sector as one that is key to the UK’s recovery from Covid-19. Through relaxing planning laws and offering stamp duty holidays, both the construction and sales market are being given valuable incentives that support an ongoing return for real estate investors.

Secured lending model

Despite these positive forces however, there remain some risks with investing in the property market, so a conservative investment strategy is key to protecting investors. Rather than take a 100% equity, or ownership, position in a house-builder, developer or single property, a portfolio-based, secured lending model, has a number of clear risk-mitigating benefits. For instance, by lending to a portfolio of developers, carefully selected on a project-by-project basis, and by earning a fixed rate of interest, rather than taking equity risk, there is inherently lower volatility in returns given the protection of a senior debt position on each development. Contracts set out clear loan terms meaning that regular interest is paid on the investment and upon final sale the repayment is made in full, all with the benefit of banking-style security protections. By contrast, equity investments and associated valuations can fluctuate over time as the asset price changes and so it is far more vulnerable to market conditions and sentiment, and ultimately any drop in value is suffered by the investor. In the lending model, any loss is initially felt by the borrower.

Benefits for estate planning

Ingenious Estate Planning Private Real Estate utilises this secured lending investment strategy. The Business Relief- qualifying service is commonly used by clients planning for later life. As savers and investors reach retirement and decumulation, they present wealth managers with a unique set of investment problems. Without careful planning, the start of this phase for many could signal the end of any capital growth and herald their savings being eroded to pay for life’s needs. Any investment offering both high volatility and potential drawdowns may therefore become unpalatable. And while many would wish to gift savings to their children to mitigate the risks to their beneficiaries of paying a hefty inheritance tax bill upon their death, the thought of losing both control and access to these savings when they may still need them, means many feel uncomfortable in taking that step.

However, this does not need to be a fate accepted by savvy investors and planners who can utilise a proven trading strategy that continues to both carefully and predictably grow their investment while also providing potentially full relief from inheritance tax.

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Getting ahead in 2020: Why building an emergency fund is the way forward



Getting ahead in 2020: Why building an emergency fund is the way forward 3

By Shahid Munir, co-founder of MintedTM, an investment platform which allows individuals to buy and sell gold bullion.

2020 has forced a lot of changes, especially where personal finances are concerned; attitudes towards investment have shifted and financial security has taken priority. Knowing that high-risk investments won’t guarantee profit, individual investors are considering longer-term alternatives and opportunities to save. So, at a time when stock markets are volatile, where should individuals be investing their money for the best returns?

While no one could have predicted the coronavirus crisis or the widespread economic devastation that has come with it, tension has been growing across global marketplaces for some time. Back in 2018, there were talks of a financial crisis and, even before the pandemic, unsecured debt hit a new peak of £14,540 on average per household. Now, with the UK entering into the deepest recession on record, unemployment climbing, and government support dwindling, the true value of quick-access ‘emergency’ funds has come to the fore.

Whether it’s a failed MOT, a broken boiler, or redundancy, in the event of a financial emergency, individuals are less likely to have the time or inclination to research the options available; many may resort to quick-fixes such as a high-interest payday loans to get themselves out of a difficult situation. According to research from Which?, 30 percent of people earning up to £28,000 a year were unable to save during lockdown. However, as recovery gets under way, it’s clear putting money aside to cover any large, unforeseen expenses can help to preserve existing finances and keep stress to a minimum.

Shahid Munir

Shahid Munir

Despite there being plenty of investment options available, very few lend themselves to building an emergency fund. With government premium bonds currently yielding virtually nothing and interest rates on cash ISAs sitting far below inflation, what was once considered safe is not only under-performing but is costing investors money in the long run. To reduce risk, investors should be diversifying their portfolios and investing in cryptocurrency or physical assets such as gold. For example, gold Exchange Traded Funds (ETFs) are popular with some individuals because they provide an easy way of gaining exposure to any increases in the precious metal’s value, while still allowing easy access to the funds if they are needed

With new types of technology platforms offering easy-to-use mobile savings apps, individuals can look further than traditional ISAs and bonds and begin to start investing in precious metals, something that may not have seemed possible in the past. Being based on an average rate of return and outperforming inflation, gold isn’t just a safe haven risk-off asset, it’s a key step towards establishing a watertight emergency fund.

While many people are looking for innovative ways to maximise saving potential, it doesn’t have to be complicated. Often, taking a step back and considering both personal and financial objectives can work wonders. This may involve analysing personal expenditure, taking stock of any outgoings and gauging their appetite for risk. It is wise to work towards building an emergency fund that covers three to six months’ worth of bills and expenses or to save around 10 percent of an annual salary.

Treating an emergency fund like any other fixed cost on pay day and separating it from day-to-day bank accounts and transactions will make it easier to commit to investing. For example, taking advantage of any platform-specific features, such as setting up a minimum standing order, can take the pressure off investing a lump sum. Often, it’s easier to reach an end goal by saving smaller, regular amounts, and topping them up where possible – autosaving apps are a perfect example of how these costs can add up over time.

Kickstarting an emergency savings fund is one of the first steps investors can take towards financial health, future planning and getting out of any debt cycles. While gut instinct may tempt people to keep money in the bank, investment in physical assets, such as gold, offers individuals the opportunity to benefit from greater returns and peace of mind, providing that all-important safety net for whatever the future may hold.

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