A little over a year ago, Standard Life’s Fund Solutions team recognised that the UK retirement landscape was quickly changing. At the front of their minds was the return of increasingly volatile investment markets – fuelled by an ever-growing list of international geopolitical and economic issues – and the ability for that same market volatility to have a significant impact on clients’ pension savings.

“As advisers already know, in a ‘Steady Eddie’ environment, clients can get overconfident. They tend to expect investments to perform very well and to continue performing at that level,” says Andy Brown, who heads up the Fund Solutions function at Standard Life. “However, something unexpected could come along to turn strong performance upside down, such as a market-shifting event. That can then have a damaging impact on retirees in drawdown or pension savers who are getting close to retirement. Advisers spend a lot of time building a detailed plan with a client, to help meet set financial objectives, so building in a way to help protect clients from unpredictable markets is crucial.”

According to Brown, the impact of market volatility on a portfolio is heightened when people are either close to or in retirement, mainly because their investments won’t have as much time to recover from any losses. As a result, clients in these two groups are also more likely to feel uncomfortable with seeing daily fluctuations in their plan valuations. This prompted Brown and his team to explore potential new solutions for pre- and at-retirement clients, and their advisers.

Developing the product

“When building an investment product, you have to think about the client and their needs,” says Brown. “Is it for a very low-risk investor who would require more exposure to lower-risk assets, such as cash and bonds, or a high-risk investor who would perhaps need more exposure to commodities, commercial property and emerging markets? This is just an example – there is a long list of factors to consider – but by identifying the client needs as a starting point, that then acts as a framework for the solution we build.”

The Standard Life Smoothed Return Pension Fund was created from this initial thought process, then developed further to meet the needs of clients with a lower- to moderate-risk appetite who don’t want to see the impact of daily market fluctuations on their investments. For this reason, the fund also includes a broad range of diversified assets, with a mix of both active and passive management approaches. It also has a mandate to flatten out daily market rises and falls in returns, to generate a smoother return for clients via the fund’s smoothing mechanism: its Estimated Growth Rate (EGR).

How the fund’s smoothing mechanism works 

“It's the shorter-term daily market fluctuations that the fund aims to smooth out – we can't fully smooth out an event like another global financial crisis, as no one would be able to do that,” adds Brown. “What we can do is ensure the variation on the returns are squeezed into a very narrow band – as narrow as possible – and that's what our smoothing mechanism attempts to do.”

Client monies are initially invested into the Standard Life Smoothed Return Pension Fund ‘feeder fund’, which grows in line with the EGR. Standard Life calculates the EGR each quarter and uses this to calculate any unit price increases at the end of each working day.

When there is more than a 10% difference with the underlying fund on any given day, adjustments are made to smooth that unit price and bring it back within 2.5% distance – this can mean either upward or downward movements. Where there is more than a 5% difference with the underlying fund, smoothing is carried out by halving the difference.

Brown continues, “The product gives clients the expectation that their investment will have a relatively smooth journey and we use all techniques available to deliver that. Volatile markets are where smoothed funds can really shine and show their plus points.”

Expertise you can trust

At Standard Life, a team of circa 70 experts work alongside Brown. Part of their remit is to ensure that the fund does what it’s supposed to, with trusted partner Fidelity International providing the underlying building blocks and fund selection.

Combined, the team’s client-centric approach to product design, the fund’s smoothing mechanism and its asset diversification, and its performance track record, have all led to the fund being well-received by advisers.

“When markets drop, if a client checks their platform app they will see that the underlying fund’s performance has kept relatively steady in comparison, which reassures them. It means that they’re more likely to remain invested. In most cases, that’s a much better outcome than a nervous client seeing the fall in value alongside a market dip and wanting to cash in at exactly the wrong time,” adds Brown. “We understand that the product user is also a client’s adviser, which is why we made sure that the Standard Life Smoothed Return Pension Fund can be included in a client's portfolio strategy via a platform,” says Brown. “It’s proving to be a popular solution.”.