Experts question multi-asset suitability for younger savers

Data released late last year by the National Association of Pension Funds revealed 49 per cent of scheme respondents offered some form of multi-asset strategy, a five percentage point rise from the previous year, with those designing schemes keen to reduce investment volatility for members.

Investment experts and financial educators have questioned the damage that could be done to longer-term investment value by this intention to "smooth", for a saver who is auto-enrolled aged 22 with potentially 40 years to ride out investment peaks and troughs.

Vivi Friedgut, founder and director of Black Bullion, which teaches people about financial security, said: “I prefer that people had that education by learning about it and then get in and do it. [Otherwise] you have lost 10 years of investment compounding and potential.” 

Will Aitken, senior defined contribution consultant at consultancy Towers Watson, agreed that younger people should be taking a greater amount of risk.

"If it is volatile in your twenties it really doesn’t matter that much,” he said, but added it was crucial that savers understand the link between the risk they take and the volatility they could experience.

Laith Khalaf, head of corporate research at Hargreaves Lansdown, calculated £1,000 invested over 40 years would now be worth £123,000 if invested in UK shares, £34,000 if placed in UK bonds and £24,000 if put in UK commercial property.

"That is a pretty sound endorsement of investing in equities for the long term," he said. "It’s absolutely fine to take a more conservative investment approach if you don’t like the volatility, but if so you need to put more into your pension plan to get the same outcome, because your returns probably won’t be as good."

Nest's low-vol approach

Andy Wiggins, head of UK institutional business at asset manager Allianz Global Investors, said: “People don’t take enough risk in DC. You have got to take risk over the longer term."

He added: "The vast majority of people go into the default so it is incumbent on the sponsor to make sure that the default takes the right overall level of risk over time."

The state-sponsored scheme Nest has been a leading proponent of reducing the volatility experienced by first-time savers, based on behavioural research it conducted before its launch that demonstrated such savers would opt out if they see too much volatility in their pensions savings.

It has a a "foundation phase" that takes less investment risk. The graphic below shows an indicative asset allocation, though this is not set and the scheme invests within a risk budget.

Paul Todd, assistant director of investment at Nest, added that at lower contribution levels, the amount of risk taken early on has a minor impact on the final outcome.

“It really doesn’t make any difference if you leverage that up to the eyeballs," he said. "The most important thing isn’t investment, it is how much you contribute.”

The scheme has modelled its strategy with and without a foundation phase, and Todd said the difference over 40 years was minor “in the grand scheme of things”.

Nick Slater, head of consultant relations for EMEA at asset manager T. Rowe Price, said he could understand the rationale for the "growing and widespread use of multi-asset strategies as the default option" within DC pension schemes.

"However, the decision to use such strategies should be a deliberate and informed decision by the member, and acknowledge the possible opportunity cost of not fully accessing the long-term growth potential of equities in the early years of their working lives,” he added.