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BLOG: Triple lock to triple threat – Investment ideas for an ageing population

BLOG: Triple lock to triple threat – Investment ideas for an ageing population
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The number of people aged 80-plus is set to more than double to six million in the next 40 years, making it likely we'll need to work for longer, as the generous triple lock mechanism is an unworkable policy in the long term.

Thanks to the generous triple lock mechanism, the UK state pension has risen 8.5% this year, following a 10.1% rise last year.

Policymakers on both sides remain committed to the controversial triple lock policy, but the bill for taxpayers is getting larger and larger. It is becoming increasingly clear that doling out cash to a growing cohort of retirees is an unworkable policy in the long term.

While I’m not there quite yet, currently, around a quarter of the population is over 60 (source: Gov UK). The Centre for Ageing Better predicts that the number of people aged 65-79 could increase by nearly a third, bringing it to over 10 million in the next 40 years.

The number of people aged 80 and over – the fastest-growing segment of the population – is set to more than double to over six million. Unless the Government’s approach changes, this is likely to bring an unsustainable burden on public finances.

Ultimately, the conclusion is likely to be that people need to work for longer.

This is not necessarily a bad thing: businesses with a 10% higher share of workers aged 50-plus compared with the average have been proved to be more productive. For workers themselves, it is a way to remain intellectually and socially active, and to stave off financial difficulties in retirement.

Professor Andrew J. Scott, founder of think tank The Longevity Forum, has created the idea of a ‘Longevity Society’, encouraging people to shift the spotlight to the extra time that health longevity brings, and its implications for how we learn, earn, consume and save.

Writing in The Lancet, he says: “Longer lives mean that at every age, individuals have more future ahead of them than their predecessors could have expected to have, so the importance of ageing well increases.

“This combination of increased time and age malleability implies changes in how individuals should behave over their lifetime. Having increased future time increases the value of investing in education, health, and financial savings.”

How to approach pension savings

At FundCalibre, our focus is only on the savings bit. This model of ageing disrupts certain assumptions about the right way to approach pension savings.

In particular, it challenges the view that investors should be automatically moved into lower-risk assets such as bonds and cash as early as their 50s and 60s in preparation for retirement – or ‘lifestyled’, to give it its technical term.

This has already been a controversial approach. Many people who were automatically ‘lifestyled’ into bonds in 2020 and 2021 saw their savings dented by the sell-off in the bond markets as interest rates started to rise.

Some lost as much as 20% of their portfolio as Government bond markets slumped, which they are unlikely to make back if they remain invested in lower-return options such as bonds and cash.

The question is over what replaces this approach. People may be working longer, but they are not necessarily at their peak earnings power. They may need to supplement their employment income with investment income.

Equally, investors need to retain exposure to the stock market to help them beat inflation over time, but – even if 60 is the new 50 – they are unlikely to want to invest in very punchy, high-growth areas.

Most will want to make some concessions to older age and the preference for a smoother ride, particularly if their earning power diminishes over time.

Carl Stick, manager of the Rathbone Income Fund, believes this is the sweet spot for equity income funds – funds that target dividend-paying companies to pay an income to shareholders. We’d be inclined to agree with him.

He says: “An equity income fund can be just the right vehicle for people wanting to take on equity risk as they approach retirement because it allows them to harvest the income it generates once they retire. That argument is timeless and still stands.

“However, in a world where we all may be slipping in and out of employment for many years, taking time out to retrain and then going back to work again, the arguments for an investment vehicle that proffers the chance of both capital and income growth look even more compelling.”

The Rathbone Income Fund has one of the best track records in the sector, and its focus on dividend growth – ‘a pay rise every year’ – has helped the fund generate inflation-busting income over the past 30 years. Carl’s focus on risk management is vitally important for older and more cautious investors.

A global option might be Trojan Global Income or IFSL Evenlode Global Income. Both funds are solid core options, with an emphasis on growing dividends over time. This is a compelling option for someone who wants to cut back their hours and supplement their income, but also needs that income to beat inflation over time.

There are multi-asset options that do a similar job. These funds will have some exposure to bonds and therefore may be less volatile than a pure stock market option. We like the BNY Mellon Multi-Asset Income and Jupiter Merlin Income Portfolio. Both are run by capable teams and have strong track records.

Increasing longevity is not a cause to panic, but it does require a change of thinking, particularly in the approach to investment planning. Working longer may seem an unwelcome solution, but the right investments can bring greater flexibility and choice.

Darius McDermott is managing director of FundCalibre and Chelsea Financial Services