Do we need to rethink the risk around asset classes & the ‘lifestyling’ in pensions? verdict from IFAs after a turbulent two weeks

by | Oct 5, 2022

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Worries about interest rate volatility following Chancellor Kwarteng’s (not so) mini-budget, as well as rising rates and the huge turbulence and concerns in the gilts market which led to the Bank of England’s intervention, have dominated the national news channels and front pages of the national media of late.

This volatility as also led a number of IFAs to warn of the dangers of ‘lifestyling’ strategies used by many work-based pensions — and how they aren’t as low risk as people originally thought.

With this in mind, IFAs have been sharing their responses to this important question ‘Do we need to rethink the risk around asset classes and lifestyling?’ and their answers are certainly thought-provoking. 

One went so far as to say ‘lifestyling’ should be renamed ‘lifestealing’, while another says “lifestyling was always a lazy, horrific idea.” Another suspects “many a financial services company will be speaking to their legal teams and bracing for a wave of mis-selling complaints”, while another still says “pension companies are sleepwalking into another PPI-style nightmare”.

We share their views as follows:

Nick Lincoln, director at Watford-based Values to Vision Financial Planning: “Real financial advisers have been warning of the dangers of lifestyling strategies for years. These come from a dinosaur age when perhaps buying an annuity made some sense. Those days are long gone yet lifestyling remains. Sure, annuity rates have gone up as gilt prices have collapsed. Cold comfort if you’re not buying an annuity. That’s like having a beautiful umbrella to go for a walk on a sunny day: pointless and useless. As ever, the most “cautious” portfolios, laden with fixed income, turn out to be the riskiest, not just in terms of short-term and unusual volatility but for perpetually carrying the real risk that is the long-term destruction of purchasing power through the insidious effect of inflation. This destruction is what will see many retirees outliving their money. But Colin Compliance is happy because the Attitude To Risk box was ticked 20 years earlier. Lifestyling strategies deserve their own box, six feet under.”


Darren Bilkey, chartered financial planner at Plymouth-based Trusted Financial Advice: “Lifestyling made sense in a bygone era, when many retirees purchased an annuity and so preservation of capital, achieved through gradual rebalancing into more defensive, typically less volatile assets such as bonds was a reasonable approach. These strategies simply don’t accommodate the new world we now live in as they are constructed according to a pre-defined set of assumptions, namely ‘you will work, retire at age X and purchase an annuity’. The retirement landscape has changed significantly over the years, and more so since the introduction of pension freedoms in 2015. As a result, many people now want flexibility from their pensions, which provides flexibility in their life. People often continue to work part-time, or pursue other career interests rather than simply hanging up their working boots at a set age. Without sufficient interest in their pension planning, many are sleepwalking into more defensive assets too early, which in turn damages their potential returns. Forget lifestyling, ‘lifestealing’ is a more accurate description for this strategy for many investors in today’s market.”

David Robinson, co-founder at London-based Wildcat Law: “Past performance is no guide to future performance, but we’ll stick a risk rating number on asset classes that is purely based on past performance to help you choose your fund. You couldn’t make it up. The financial services industry has a problem of its own making. It is fixated with volatility risk, in short how much a fund moved up or down compared to its average. All fund fact sheets have a number rating for the fund between 1 (low) to 7 (very high). This is based on historical volatility but, as has been starkly demonstrated recently, this may have no bearing on how a fund will perform in the future. A fund that is a 3 today may be a 5 later in the year. For years, fixed interest and gilt funds had low volatility. Why? Because interest rates stayed low and barely moved. However, as soon as we saw large increases in interest rates we saw significant falls in Gilt fund values. This was not unpredictable, but for years many have used the ‘risk ratings’ without understanding how they can change, and change dramatically. I suspect many a financial service company, both advice and insurance company alike, will be speaking to their legal teams and bracing for a wave of mis-selling complaints. Lifestyling is one of the key culprits for many who have taken significant falls. To their credit the large pension providers have moved away from it for exactly these reasons but there are thousands of people in legacy pensions that still use this approach. The majority will be those who have not sought financial advice and have been re-assured by the fund fact sheets they have received. They will not have read or understood the short section of wording regarding interest rate risk and so are left facing potentially life-changing falls in their pension funds. So yes, lifestyling is obsolete, but the real villain is the risk rating system that, at best, is confusing and at worst downright misleading.”

Adam Walkom, Co-founder at London-based Permanent Wealth Partners: “To say the writing has been on the wall for lifestyling is the understatement of the century. Good riddance to this ridiculous strategy, but as ever, of course, it’s the unsuspecting investors who pay the price. Pension companies are sleepwalking into another PPI-style nightmare with the insistence to push unsuspecting investors into Lifestyle or Target Date funds. As interest rates rise from zero or thereabouts, then there is only one way bonds can go, and that’s down. Lifestyle strategies automatically, without the client’s consent remember, move portfolios into “safe” assets such as bonds and cash. In many cases these will make up nearly 70% of the investor’s portfolio. Yet this investment strategy will be almost guaranteed to lose money as interest rates rise, let alone nowhere near keep up with inflation. Despite this, pension companies continue to push investors into these funds as their default option. The UK Government-backed NEST pension scheme, which now has £21.9billion of investor assets from 10.4 million investors, even admits that over 90% of people never change from the default fund they are invested in. That’s 10.4 million people – just from one pension company – who have a very real chance that their pension will not keep up with the cost of living. If an IFA was to make a change to a client’s portfolio without their consent, he would be hung out to dry by the regulator. Why isn’t the same happening for pension companies?”


Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management: “Bonds are a crucial part of diversified and balanced portfolios but it’s always important that clients are aware of the possible risks ahead of investing. Government bond prices move inversely to interest rates and the longer the term of the bond, the more sensitive the bond price is to rate changes. A 10-year bond typically loses around 10% of its value if interest rates go up by 1%. In the UK, we have seen interest rates move this year from 0 to 2.25%, but recently the market sees rates climbing to 5% or even 6%. This has translated into falls of more than thirty percent in long-term bonds. Shorter term bonds, however, have much less sensitivity to rates. Cautious portfolios should generally hold short-term bonds, and cash and near cash funds. Recently, we have seen some of the worst returns in bond markets in 100 years. In fact, a typical 60/40 portfolio of US stocks and bonds is down 21% so far this year in dollar terms, which is the worst return since 1931. This is because inflation has shot up to levels that developed markets have not experienced for forty years as the economies have recovered from Covid, and because of the war in Ukraine. Economic adjustments of this scale happen rarely. But it’s also wrong to completely rewrite a proven strategy on the back of one year’s events. Inflation will fall at some point, and it already is in many countries as oil prices decline, and then there may be a recession, meaning deflation and the likelihood interest rates will have to be cut again. Bonds will then once again shine in a portfolio, even as equities possibly decline. As Niels Bohr, the Physics Nobel Laureate once said: “Prediction is very difficult, especially if it’s about the future”. Bonds will continue to play their role and can reduce portfolio risk.”

Graham Wells, financial coach at Haddington-based GroWiser Financial Coaching: “Fundamentally, the risks of different asset classes have always been there. It’s just that most people don’t understand them as it’s not taught in school or at work. Many employer pension schemes adopt a ‘lifestyling’ strategy in an attempt to reduce volatility as workers approach retirement age. In theory, this saves individuals from having to think about it. It’s deemed automatic de-risking for the financially ignorant. The problem? The traditional idea of “retirement” is fast disappearing, as sure as the concept of a “job for life” makes little sense to those in their 20s and 30s. We’re entering an era of multiple careers, mini-retirements and lengthy sabbaticals, so flexibility is key. The idea of ‘lifestyling’ was founded upon the assumption that workers would retire fully at a specific age, then use their pension fund to buy an annuity with a set income for life. The current economic situation simply highlights just how inappropriate and dangerous that assumption is. Everyone who is in a default pension fund at work needs to take the time to understand what this means and take action if necessary, or seek advice if they don’t fancy learning about it. That one action could generate thousands, perhaps even hundreds of thousands of pounds, over a lifetime.”

Wes Wilkes, CEO at wealth managers IronMarket: “If you take a 60/40 portfolio, the 40 element was never ‘risk free’. Everyone has become used to that part of their portfolio not doing a great deal for 10 years or so and, in an ill-educated attempt to explain it, referred to it as low/no risk and a way to dampen equity market volatility. We should all be singing from the hills with all these rate hikes, as we’re now going to be able to get a return on the 40 part, too. The risk of assets hasn’t changed but maybe, for us as a profession, it’s a kick in the backside to make sure we’re explaining them better. Lifestyling was always a lazy, horrific idea.”


Edward Richardson, chartered financial planner: “The theory behind lifestyle funds is simple: as you approach retirement, the money is moved into ‘more cautious’ funds. However, the theory does not allow for the fact investing is not simple. Another, often overlooked threat, is the massive tracking error that can often be found within the Index Tracking funds commonly used within lifestyle funds. These errors can amount to several percent per year and lead to a significant drag on the performance of a pension.”

Adrian Kidd, chartered wealth manager at Aylesbury-based EQ Financial Planning“The risk of holding bonds, particularly government bonds, is not well known by non-professionals. People naturally perceive them as low or no risk. The industry hasn’t helped with a “defensive assets” label. In the current environment, you have the two main destroyers of fixed income returns in abundance, namely inflation and higher rates. If you have been in a default option, which is what lifestyling entails, you are in for a nasty surprise. Hopefully, you have had an adviser alongside you, and they have understood what your actual needs are. For example, if you were risk-adverse or did not have enough funds to warrant drawdown plans, your smart adviser would have understood your needs, listened to your concerns and moved into cash a year or two ago to preserve the returns generated so you could buy your annuity. Maybe you also were saying you’d be invested for life, the funds are big enough for a drawdown plan, you have other liquid assets, then you’d have ditched lifestyling options and gone more into equities and accepted the risk, although this still would have likely fallen less than a 75% bond portfolio. There is plenty in between these two conversations but I think i’m trying to highlight the importance of ongoing and regular advice. Once a year meetings, if that is all you’re getting, are practically worthless in the current world we live in. It’s not the asset classes that need a rethink, it’s the engagement with people about what they really need from pensions that needs the rethink. This is especially the case with company-based schemes and how ongoing advice is administered and paid for.”

Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial: “No. The inherent risk of all of the asset classes hasn’t changed. We have experienced interest rates rising like a rocket and a new government with extremely poor communication skills. If you look at US Treasury funds, they are down but not as much as UK Gilt funds. Of course, they aren’t down as much as the Dow (20%). Unfortunately, we still have correlated asset classes, since 2008. Although the correlation might invert, as it’s supposed to, once interest rates reach historic norms. That would be great for multi-asset investors, particularly lifestyle funds. Lifestyle funds are still a good idea for those who want to annuitise. Fund administrators could look at switching a higher proportion to cash earlier, but that is always a balance as you don’t want to erode the real value of the fund earlier than you have to. However painful, I would put this down to a once-in-a-generation perfect storm.”


Tim Mottram, financial planner at London-based Grey Parrot Financial Planning: “Most portfolios are constructed using modern portfolio theory, which has been around since 1952. Modern Portfolio Theory guides the construction of portfolios at different risk levels to suit a wide range of investors. Typically, bonds have played a role in reducing risk. Since 1952, it has been known that bonds are sensitive to interest rate movements. The effects of the base rate increase over the past few months on the bond market have caused them to shed value. In the short term, bonds have not played their usual role of reducing risk. Over the long term, bonds have proved less volatile than equities. So the question is, should we let short-term volatility change a theory of risk management that has worked for 70 years through many market crises? The answer is no.”

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