1. The Investing for Drawdown Challenge
Gavin Jobson-Wood
Specialist Business Development Manager
For Adviser Use Only

2. KEY LEARNING OBJECTIVES
Understand the specific investment & advice considerations for clients approaching, and at, retirement.
Understand what a dynamic volatility managed strategy is.
Understand the benefits of using this type of investment strategy for you and your clients.

3. Drawdown The ‘New Norm’
“Drawdown has become much more popular: twice as many pots are moving into drawdown than annuities. Before pension freedoms, over 90% of these were used to buy annuities.”
“We recognise that innovation may pick up as DC pots grow in size and the industry is given more time to develop propositions.”
FCA Retirement Outcomes Review Interim Report – Published July 2017
Drawdown as the ‘new norm’ has become established
twice as many pots are moving into drawdown than annuities
The FCA and the financial media has regularly expressed its desire for innovation
The challenge is many of the more recent drawdown cases were smaller values
Financial advisers are now adapting their advice models - CRP 3

4. THE RETIREMENT INCOME REVOLUTION
Over 3 years since pension freedoms were introduced and the shift from annuities to drawdown
Drawdown is now accessed by clients with lower fund values who have less financial experience
How do advisers deliver a clear, consistent and repeatable process?
What can be done to reduce the risks around investing for retirement income?
The FCA are increasing their focus on retirement income. Would your advice process pass scrutiny in a future thematic review?

5. CIP v CRP
CIPs and CRPs represent the principles of good advice governance not just a fund range.

6. Flexible income – the risks

7. SEQUENCE OF RETURNS RISK
A, B & C each has:
£100,000 at the start of year 1
The same average return over 10 years
In 9 of the 10 years – return is 5%
In 1 of the 10 years there is a 20% loss
Withdrawals of £10,000 per annum
The same average volatility over 10 years
Gross returns, no charges have been deducted

8. SEQUENCE OF RETURNS RISK

9. 4% annual withdrawal of invested portfolio.
Bengen’s ‘4% Rule’
4% annual withdrawal of invested portfolio.
Increasing annually by inflation.
Portfolio of 50% U.S. equities & 50% U.S. bonds.
Assumes no charges.
Conducted in 1994 using historical data.
Source:

10. Sustainable withdrawal rates

11. A natural income v total return? Absolute Return strategies
INVESTMENT STRATEGY
Reducing the retirement income risk:
A natural income v total return?
Absolute Return strategies
‘Smoothed’ Funds
Building a cash reserve strategy

12. INVESTMENT STRATEGY Does one size fit all?
Discretionary Fund Management
Model portfolio
Fund panels
Single multi-asset fund

13. Multi Asset Funds The Price Consideration
MULTI-MANAGER
ACTIVE
Traditional & Alternative Asset Classes
Price
ACTIVE
Traditional Asset Classes
The asset-class components used within multi-asset funds can vary significantly. Naturally there is often a trade off between the cost of the fund proposition and both the diversification (by way of asset classes) and degree of active management.
The introduction of additional esoteric asset classes , that are non-correlated to other asset classes, has increased in popularity in recent years.
It’s worth noting that whilst funds might utilise passive components there could be active management in respect of the asset allocation (Strategic and Tactical).
PASSIVE

14. Significant volatility
Equity investing exposes the client to investment risk and the potential for loss
The sustainability of customers income drawdown can suffer in the long term
Historically high volatility has been an indicator for loss
There are many examples such as the dot.com bubble and the more recent global financial crisis
Managing significant volatility can help a pension pot last longer 14

15. DYNAMIC VOLATILITY MANAGEMENT OVERVIEW
When volatility is acceptable the fund performs like any other fund, exposed to equities, with the potential growth available
As volatility rises, the risk of losses also increases. An automated algorithm monitors volatility
Volatility may become significant, enough to exceed the threshold we have established
If this happens we start to reduce equity exposure in proportion to the severity of the risk
The algorithm continues to monitor volatility. It may eventually drop back below the threshold
If that happens, equity exposure returns back to the SAA allocated amounts for the fund.
NB – When DVM is dormant, it has little drag on the performance of the fund, so provides full access to market returns 15

16. Using derivatives
The Retirement Portfolio Funds use derivatives as part of the investment and volatility management process.
The investments for the Strategic Asset Allocation use a combination of:
Physical investments in equities and bonds
Long Equity Index Futures
Equity Futures (held long) provide a return similar to the equities they mirror
The futures we use are from large, highly liquid, daily traded indices
When volatility becomes significant and exceeds the threshold, the DVM is triggered and we start to de-risk
Instead of selling physical equities, we start to adjust our futures position instead
We convert our long equity future position to a short equity future position
Equity Futures (that are held short) provide a rising return when the equities they mirror fall in value
This helps reduce investment losses
As volatility becomes more acceptable, the process is reversed
This is efficient, quick and low cost 16

17. Back-Testing
We have back-tested the funds to see how they would have performed
We looked at some common and familiar situations
Our back-testing looked at funds in drawdown (£100k, 4% inflation adjusted withdrawal)
We compared the same asset allocation with and without DVM
The Dot.com tech bubble
The Financial Crisis
A steadily rising market, with acceptable levels of volatility (When the DVM is dormant it doesn’t drag on performance)
The details are available in a separate pack 17

18. Future Simulations
We have tested the funds to see how they would perform in different future situations
We completed 5000 different scenario tests using a stochastic forecast
Our testing looked at funds in drawdown (£100k, 4% inflation adjusted withdrawal)
We compared the same asset allocation with and without DVM
We looked at when they were most effective
A loss in the early years of retirement – sequence of returns risk
We also looked at when they were less effective
A sudden sharp fall – An example would by like Black Monday in 1987
The reason is that there would be no signal from rising volatility – the fund would react like the rest of the market
The details are available in a separate pack 18

19. KEY LEARNING OUTCOMES
Understand the specific investment & advice considerations for clients approaching, and at, retirement.
Understand what a dynamic volatility managed strategy is.
Understand the benefits of using this type of investment strategy for you and your clients.

20. FLEXIBLE RETIREMENT SOLUTION
WITH LOW INVESTMENT CHARGES DRIVING SUSTAINABILITY
Retirement Account Single Plan
Retirement Planning Retirement Income
Property
Purchase
Share dealing
DFM
(inc MPS)
Self-Select Fund Range
Adviser Portfolios
Solution Multi-Manager Funds
( %*)
Premier Pension Portfolio Funds (0.4%*)
Retirement Portfolio Funds (0.2%*)
Pension Portfolio Funds (0.1%*)
Scottish Widows
Pensions Funds
Fixed Term
Cash Deposits**
Governed
Investment
Strategies and
Premier Governed Investment Strategies *
Solution Funds
Fund
supermarket
Share
dealing
Investment Advice Requirement
SW Governed Multi-Asset Funds
*Total Annual Fund Charge

21. August 2018
Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number