How With Profits funds offer a smoother journey for clients

by | Jul 31, 2023

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Head of intermediary Distribution at Wesleyan, Nick Henshaw, discusses the significance of With Profits funds to mitigate volatility and moderate risk.

Accepting some level of risk is a fundamental part of investing, but what happens when a client’s confidence is knocked?

It is easy to understand why anyone looking at recent market performance could be tempted to think again about where to keep their cash, especially if they are close to retirement.

The FTSE 100 generated returns of 5% during 2022, for example, a time when inflation was running at 9.2%. And during that time, it saw a number of sharp peaks and troughs in performance.


Against this backdrop, anyone approaching the end of their working life will have legitimate concerns about how best to preserve their pension pot.

As a client gets closer to that inflection point when they retire and accumulation switches to decumulation, market volatility can be a source of great stress.

So, how can advisers help moderate this risk and ease their client’s anxiety?


Accumulation proposition

Most UK advisers operate using a centralised investment proposition during their clients’ accumulation phase, which brings many advantages.

It means that companies apply a standardised method of selecting approved investment portfolios for all their clients, based on things like their appetite for risk, time horizons and preferences, such as sustainable investing.

Each portfolio will feature a mix of assets in varying weightings, which will be constantly monitored and regularly reviewed.


It is a top-down approach that provides a common set of guidelines around how advisers invest for their clients, which is what makes it so popular with companies and advisers too.

A standardised approach ensures consistency of advice across the company, helping ensure strong governance and compliance in a highly regulated market.

Having a range of packages that suit different classes of clients also brings efficiency benefits, as advisers do not have to start from scratch and create a bespoke package for every client, freeing up time to engage with clients face-to-face and build better relationships.


It also enables economies of scale that mean companies can charge lower fees, reducing the overall costs to clients, and making their offer to the market more attractive.

Tipping point

Quite simply, the aim of a Central Investment Proposition (CIP) is to help clients accumulate the largest retirement pot possible.

Commonly, a portfolio would evolve over time, with an early focus on riskier equities, stocks and shares shifting to a more cautious portfolio featuring a higher proportion of fixed interest bond holdings as retirement approaches.


At the point of retirement comes the tipping point where a client switches from accumulating wealth to decumulation. That means switching from a CIP to a Centralised Retirement Proposition (CRP), which is designed to help that pot last as long as possible.

Reducing risk

Much like a CIP, a CRP applies a standardised approach to retirement advice across a company and which typically includes investment and withdrawal strategies.

Again, an adviser will typically be able to choose the best option for their client from a range of packages designed to match a variety of risk profiles and retirement goals.


But as clients approach the transition from accumulation (CIP) to decumulation (CRP) the spectre of sequencing risk rears its head. This is where poor performance in the late stages of accumulation or early stages of decumulation has a significant impact on the value of a portfolio.

If you have a poor investment event at the wrong time, or there is an economic shock outside anyone’s control, it can have a material financial and psychological effect on a client.

Those whose retirement date landed in spring 2020, for example, will have watched in shock as the value of the FTSE 100 fell by almost a third in little more than a month.


Drag and drop

The vast majority of clients would not be able to stomach such losses, which could cause extreme anxiety, as well as ‘pound cost ravaging’. Advisers will be familiar with the concept of ‘pound cost averaging’.

A combination of regular investing, alongside investing one-off lump sums, can help to smooth out the impact of market volatility on clients’ investments over the long term. This is because with regular investing, they are doing it regardless of whether prices are high or low at the time.

For savers in accumulation who are prepared to wait for prices to rise before accessing their investment, pound cost averaging represents an opportunity to buy more units more cheaply as markets fall. It also avoids clients delaying putting money to work while they wait for the “perfect” time to invest.


Ultimately, the return on a client’s money is more likely to be determined by the overall trend in the market than by the price they get if they invest a lump sum on one specific day.

Take this example over a three-month period, with £1,000 being invested each month, from June, with an initial unit price of 100p.

In July, the price drops to 90p, and in August goes back up to 100p. In the table below, you can see that the clients’ £1,000 investment in July enabled them to purchase more units at the lower price of 90p. This means the £3,000 invested over the three-month period is now worth £3,111 as at August.


Now this example is not representative of the current market, and there is no guarantee that investing regularly means that an investment will be better off for doing so. But it does illustrate that regular investing tends to lead to better outcomes in temporarily falling markets, as pound cost averaging represents the opportunity to buy more units more cheaply.

The opposite – pound cost ravaging – is where a client ends up having to cash in more investment units, in this example, when markets are falling in order to maintain the same level of income.

And then there is volatility drag. A 15% loss in year one requires 18% return in year two just to return to the original value. Making withdrawals when a portfolio is down essentially locks in those losses for good.

Faced with such a prospect, a client might be prompted to review their retirement plans, accept a lower level of income, or even keep working in an effort to fill the hole in their pension pot.

Sequencing risk and volatility drag are also risks for advisers; when portfolios – and therefore their assets under management – see significant falls then recurring income will (usually) fall too.

In a fix

This all means that, for clients in decumulation it is important that their CRP can deliver sustainable income in order to reduce longevity risk – the possibility that they will outlive their investments and run out of income.

But there are widely practised strategies for mitigating sequencing risk in the later phases of accumulation and the early years of decumulation retirement.

Typically, that would mean migrating to a higher proportion of fixed interest investments in the final years of accumulation.

Fixed interest investments can be an important part of a diversified investment strategy because historically they provided a reliable income stream at a relatively low risk, though, reflecting that the level of return is often lower than equity investments.

But recently high inflation and rising interest rates have been bad for bond performance. So, is it time to stick (and wait for values to rebound) or twist (and sell up to invest in alternative assets)?

Smoother sailing

One option is a smoothed investment solution such as With Profits funds, which are designed to reduce day-to- day market volatility.

They typically aim to provide steady growth by investing in a diverse range of assets, including UK and International shares, fixed interest stocks, property, cash and other related investments.

But returns are smoothed using a mechanism that reduces the impact of short-term price fluctuations.

So, when the With Profits fund is performing particularly well, not all returns are passed on to investors straight away.

Instead, some are held back, to be released to investors during times of poorer performance to help cushion any fall in value.

This helps lower the risk of significant fluctuations in value in the run-up to the CIP to CRP transition, mitigating against volatility drag, and can help to reduce sequencing risk during decumulation.

Remember that clients’ solutions can be blended and wrapped up with other funds and products in a CIP or CRP to help balance overall risk and reward.

With Profits funds can be an important part of the puzzle if there are clients approaching retirement or planning to access their pension or ISA savings in the next five to 10 years.

That should be enough time to see the benefit of an investment proposition product that is available via independent platforms and for some reason has retained a pretty low profile in the past.

In 2023, I think it is time for a smoother journey.

About Nick Henshaw

Nick leads Wesleyan’s Intermediary Distribution channel, with responsibility for their intermediary distribution strategy, proposition and structure.

Nick joined Wesleyan in April 2021, and has proven track record of building and maintaining business relationships in the UK intermediary and investment platform markets.

07384 7963210

For more information on Wesleyan’s smoothed With Profits Fund, click here.
Follow Wesleyan for Intermediaries on LinkedIn here.

Please note that past performance is not a reliable guide to future performance and the value of investments, and any income can go down as well as up, so you could get back less than you invested.

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