Tackling the changing investment landscape

The investment landscape is continuously evolving and as it does so traditional measures of benchmark performance have been found wanting. Until recently, investment managers were set index benchmark targets to outperform. However, the extended bull market in equities prior to March 2000 obscured the fundamental weakness of this approach. During the three-year bear market that followed, many investment managers found that they had unhappy clients despite outperforming these index targets due to the increasing gap between assets and liabilities. This experience highlighted that the industry was failing to meet clients' primary needs, which was to outperform their liabilities, rather than an index benchmark.

The introduction of changes to accountancy standards (FRS 17) and realistic reporting for insurance companies has heightened the importance of the short-term investment horizon. It is now clear that the true need is to produce investment returns that give clients the ability to meet their liabilities at any given point while still enabling them to access asset classes that give them the best opportunity to achieve their long-term return objectives. It is also essential that clients take account of the risks that might impact their ability to meet future liabilities. For instance, what would be the impact on a pension scheme's funding requirements should interest rates fall?

Demand driven by pension schemes, consultants and institutions
We have seen an increasing demand from investment consultants and institutional investors for investment strategies that are driven by their own liability requirements. Investment has become less about beating the index and more about achieving a good return and maintaining financial stability. To meet this new objective, clients need to select a manager with expertise in active management as well as a breadth of experience in quantitative risk management, technical issues driving their liabilities and the use of investment bank products.

Developing innovative solutions to meet financial challenges
Standard Life Investments Strategic Solutions service allows investment in line with long-term return objectives, while ensuring key short- and medium-term risks are considered. Investment solutions are designed around specific liabilities and risk budget. These can be provided by the institution or developed through discussion with Standard Life Investments and the institution's advisors. Once a portfolio is invested, our dynamic market-risk-allocation process is used to mitigate short-term risks while aiming to outperform the long-term return objective. Standard Life Investments has established the Strategic Solutions Unit in recognition of the growing importance of this service. The unit is made up of seven investment professionals, offering a combination of active management expertise, actuarial knowledge and quantitative skills.

Further information
For further information on Standard Life Investments' Strategic Solutions or to arrange an initial discussion, please contact

Christopher Nichols or Sarah Smart
Standard Life Investments
Strategic Solutions Unit, 1 George Street, Edinburgh EH2 2LL
Tel: (44) 131 245 5425, or (44) 131 245 7257 E-mail: christopher_nichols@standardlife.com, or sarah_smart@standardlife.com

SIMPLE PENSIONS WILL STIMULATE THE DESIRE TO SAVE

What sort of pension do you want? The simple answer might be, "one that provides a decent level of income in retirement". This, of course, should be the point of pensions. But this simple view is often lost in the complex and jargon-strewn world of old-age saving.

How many potential savers are turned off by talk of AVCs, personal pensions, contracted-in money purchase schemes and the like? Thankfully, policy makers now recognise that successive governments had built a layer cake of tax rules that over-egged the pensions pudding. The emphasis is now on minimalism, and the Inland Revenue has done an admirable job in paring down eight sets of pension tax rules into just one.

So what have we got? For all practical purposes, the ability to save whatever we want, whenever we want into whatever retirement savings product we happen to choose. True, there is a limit on personal contributions of 100 per cent of earnings - but how many people can afford to save all of their earnings? And, yes, there is a limit of ?1.5m on the pension pot you can build up - but how many people will ever get within touching distance of that number?

Apart from keeping pensions simple, the Inland Revenue has also made saving for retirement attractive. For starters, there will be a complete lifting of investment restrictions.

The ability to invest one's savings in buy-to-lets, holiday homes, fine wines and art has already begun to stimulate the imagination of a public disillusioned with pensions. Such investments may appear to be out of reach for most savers, but that need not be the case. By using a combination of existing paid-up pension funds and the higher contribution limits, a sizeable fund can be quickly built. As noted above, people are unlikely to save 100 per cent of their earnings every year, but they might be able to do so as a one-off if, for example, they received an inheritance. Additionally, their pension fund can borrow half of the accumulated pot, further boosting the amount available to shop for desirable investments.

There is a perception that self-invested pensions are expensive. But for those with funds of ?50,000 and up, they can actually prove cheaper than a charge-capped stakeholder pension.

Another significant change introduced by the new rules is the scrapping of the requirement to buy an annuity at age 75. After that age, income drawdown can continue with a couple of additional restrictions. People who stay in income drawdown throughout their lives are likely to die with some of their savings still intact. If no spouse or dependants exist at that point, these residual funds can be passed on to other members of the same pension scheme. If those other members include children and grandchildren, then pension funds can cascade down the generations.

Report after report tells us that we are not saving enough for our retirements. Educating the consumer is an important factor in encouraging people to save. But perhaps more important is the need to nurture the desire to save at all. The simplicity and attractiveness of tomorrow's pensions might just do the trick.

Further information:

John Lawson, Marketing Technical Manager
Standard Life, Dundas House, 30 Brandon Street, Edinburgh EH3 5PP
E-mail: john_lawson@standardlife.com

References to legislation and taxation are based upon Standard Life's understanding of tax and Inland Revenue practice at the time of writing. Legislation and taxation are liable to change in the future.