Schemes should increase their focus on income in the search for returns, experts have said, but some have raised doubts about the opportunities currently available in the credit sector.
Schemes typically assess investment returns by the potential for growth, as well as income and risk profile, but experts said searching for high-quality income would provide better results.
John Walbaum, head of investment consulting at Hymans Robertson, said the rising popularity of diversified growth funds was symptomatic of the focus placed on growth.
If you pursue income through assets with the potential for growth, [growth] will come naturally
Scott Jamieson, Kames
But he said: “If not now, then certainly later, [schemes] will need income more than they’ll need growth. The generation of regular income is going to be more important.”
Since a scheme’s objective is to provide members with a retirement income, Walbaum argued schemes should look at investing for income rather than growing a pot to buy income later.
Walbaum said some schemes were gradually changing their approach, which could lead to a proliferation of ‘diversified income’ products launching.
“I think we’ll see more products that provide diversified income,” he said.
Credit investing
The shift towards income investing will naturally lead to an increase in credit investment, Walbaum said, as “yield is more predictable than growth”.
“Schemes are already doing it to a degree. We’ve seen an increase in allocations to credit.”
He added: “[Defined benefit] pension schemes are essentially annuity funds with a deficit. Once the deficit is gone they’re income vehicles.”
However, Scott Jamieson, head of multi-asset at asset manager Kames Capital, was sceptical about investing in credit in the current environment.
He said: “There are times in the market cycle when credit has attractive yield. There aren’t too many sources of attractive yield in the credit market for us at the moment.”
He added schemes should look to invest for income, but allocate towards assets that also had the potential for growth.
“If you pursue income through assets with the potential for growth, that will come naturally,” he said.
Jamieson said open-ended pension schemes still follow the “traditional” approach to solvency, focusing on capital matching and growth rather than generating income
John Belgrove, partner at consultancy Aon Hewitt, said schemes should consider their own circumstances when deciding an investment strategy.
He said: “I don’t think there’s any flavour build that will solve all the issues,” he said.
“Income is a part of it but so is risk management and so is growth.”
The original version of this article incorrectly stated Scott Jamieson was head of multi asset credit at Kames Capital. This has now been corrected.
