Global asset management said plan gives clients extra two years of consumption income
Schroders believes it can put an additional two years of retirement income into people’s pockets with its Canada-specific strategy.
The global asset management tackled the issue of longevity at a recent roundtable in Toronto after its survey revealed 53% of plan sponsors thought the current products on offer would not provide enough income to last them through retirement.
Neil Walton, head of investment solutions, said making sure a client’s funds lasted through old age was top of his priority list when it came to devising MyRetirement Funds.
He said the average longevity of Canadians is mid-to-late 80s (86-87 years old) and worked on the premise that most people will retire at 65. Walton praised the structure of the country’s OAS and CCP, which he said were more sustainable that other plans around the world.
“We wanted to build something on top of that which is completely about the context of Canada given the state provision that has a nice inflation link element to it and that looked at actual consumption patterns for current retirees.”
These, he added, are pretty uniform for the first 20 years of active retirement, coming to about 1% below inflation of average increased expenditure as people age and become slightly less active.
Walton admitted that cracking the longevity piece is a challenge and addressed the “good risk” of someone living beyond 85 by focusing on three areas. The first part is, from 65, having a proportion of funds in a Canadian real-return, inflation-linked government bond.
Walton said: “The idea is that the bond will be held through the structure for 20-25 years up until 90 so there is an asset that has a roll up to inflation and a permanent protection of inflation as a residual part of the portfolio at 85-86.”
The second aspect to ensure enough money for later life is to have part of the structure – just less than half - continually invested in return-seeking diversified and dynamically managed assets.
Walton said: At retirement point, [the idea is] not to be all in very secure assets but to still be running a sensible degree of risk to earn returns when a participant’s pot is at its largest and when you start to use it.”
The final part of Walton’s longevity jigsaw is that during the 20-year period – from 65 to 85 – there is quasi annuity.
He explained: “At the point of retirement (65), the plan has built into it a series of bonds, government and provincial, and potentially some corporate bonds. The first 20 years of income is basically aimed at an individual’s essential spending.
“The benefit of securing that income is that it’s there, it can be harvested for a 20-year period and markets can move around, but the majority of that is provided by government and provinces. The delivery of that 20 years of income means you mitigate a lot of market risk.”
Walton said the net effect of these three elements is that it adds two years of additional consumption, decreasing the chance a client will burn through their cash.
He said: “If you look at the chances of running out of money from a target-date structure, these techniques are reducing that so in comparable median outcome, it’s similar-ish but in downside outcomes we are adding about two years of extra expenditure of a retiree’s life, which for an individual in that situation is pretty valuable I think.”
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