Retirement is a crucial moment in a person’s life, but approaching this watershed moment is something known as the Retirement Risk Zone. This usually starts five to ten years before an individual’s retirement date and presents a change in psychology around retirement. As a person begins to realise that they will soon stop accumulating income, they become less worried about missing out on market upsides and instead want to preserve their money for when retirement begins.

This seismic change in priorities is partly why Standard Life launched its Smoothed Return Pension Fund, a strategy designed to smooth out market movements and give investors greater peace of mind. Samantha Pardoe, Senior Investment Development Manager, is part of the team that oversees this fund and sees this playing a crucial role in a delicate time for investors’ nerves.

“You've finished with accumulation, you get to the point where you're probably not going to buy an annuity with the whole fund value anymore and a lot of clients aren't doing that because they want that flexibility, so that money is going to stay invested,” explains Pardoe. “But you do need to start doing something to preserve that pot that you spent a number of decades building. That's a perfect spot for smooth funds.”

Stabilisation for returns

The structure of a smoothed fund means a steadier return is targeted. Specifically with the Standard Life Smoothed Return Pension Fund, an estimated growth rate (EGR) is calculated which is then used to target performance. The aim here is stabilisation which Pardoe says is about “dampening out” the volatility that has become more common post-COVID.

“Since COVID, markets have basically been more volatile than they were beforehand – it’s more persistent now so it becomes even more relevant for those clients,” says Pardoe. Though she warns a Smoothed Fund won’t nullify major market drop offs, she explains how this strategy can play a helpful role in the day-to-day ups and downs of markets that may concern investors.

“Rather than having that constant up and down that with a traditional net asset value fund, you're going to have that much smoother journey with potential steps up and steps down along the way but not constant,” adds Pardoe.

Smoothed funds in retirement

In decumulation, investors are still concerned about volatility but with the added concern of extracting income as well to cover day-to-day expenses. Fortunately, the flexibility of smoothed funds can offer more than one route to income for those in retirement. With a smoothed fund, investors in retirement can either rely solely on the strategy for decumulated income or use this as part of a bucket strategy. In the latter, another source of income such as an annuity or cash provides the regular income while a smoothed fund acts as a second “bucket.”

The bucket approach can be staggered with separate buckets of assets established based on periods of time during retirement. Each would carry a different level of risk and investments based on the investor’s goals, risk profile, behavioural capacity, timeframe and need for money.

“We're taking some of the risk off the table for clients and giving them something that is a much more stable journey for them that helps them to sleep at night,” says Pardoe of retired investors using the Standard Life Smoothed Return Pension Fund. “But we're still giving them that flexibility that they want and that's really key for a lot of clients at the moment.”

Furthermore, growing regulatory scrutiny around retirement propositions within the advice industry is creating new user cases for smoothed funds. In its recent thematic review of retirement income, the FCA highlighted how centralised retirement propositions could have a beneficial effect for advised clients. Here, Pardoe says smoothed funds can provide advisers with a helpful tool to complement their retirement offering and how they create income solutions for retired clients.

“This is where smoothed funds fit in really nicely because you've got your investment proposition and, you can continue using that, but you can slot smooth funds in at the appropriate time for clients, depending on their needs,” says Pardoe. “Importantly, having the smooth fund on the platform means that it is quite adaptable - we're giving advisers the options and it's down to them to then tailor it and make it suitable for the specific client.”