Navigating the cost of living crisis: the SEI glidepath

To say that Age UK’s July report makes for sober reading is perhaps an understatement.¹

Whilst stories of people struggling to cope with soaring food and energy prices have sadly become commonplace, the scale of the problem has arguably not received due attention. Forty-five percent of over-50s admit they are currently finding it hard to pay their energy bills, with a quarter saying they’d be unable to afford an unexpected, but necessary, expense of £850.¹

Clearly, those approaching retirement will need more money saved today than they would have done 20 years ago. Given the known, long-term effects of even modest levels of inflation, that much is not surprising. But those retiring in 2022 needed substantially more saved than those who retired the year before.

The Pensions and Lifetime Savings Association’s (PLSA’s) updated Retirement Living Standards reflect this.² In 2021, the PLSA estimated a pensioner would need £10,900 a year for what they define as the ‘Minimum’ standard of living. By 2022, this estimate had risen to £12,800—an increase of almost 20%.³

Figure 1 – The amount needed in retirement has risen significantly from 2021-22

Source: PLSA, SEI. For illustrative purposes only. See full PLSA article (footnote 3) for further information. 

It’s here that we get to the crux of the matter.

There are two main ways to influence retirement outcomes for members in a defined contribution (DC) pension scheme: contributions and net investment returns. However, we believe the current environment makes it both harder for members to increase the amount they’re putting into their pension, and harder for investors to achieve above-inflation returns.

In the first part of our cost of living commentary series, we explored the contributions challenge. In this second part, we look at how a well-designed, to-and-through default strategy can be used to deliver a sustainable income for members, and target real, long-term growth.⁴

Just how can an investor hedge against inflation in the growth phase of retirement saving?

Let’s start from the beginning—in general terms, investing for retirement can be summarised as follows: invest in riskier assets when a member is young, and transition to less volatile assets as a member nears retirement. 

Members are unable to withdraw funds from their pension until they are at least in their fifties, and someone in their thirties is unlikely to drawdown for another 30 years—perhaps more. Whilst the value of ‘riskier’ assets that maximise growth (think equities) have a tendency to fluctuate, younger members can afford to take such risks because they have the time to make up for any losses.

But as a member approaches retirement, loss aversion becomes more important. In the ten years to retirement, a greater proportion of a member’s pot will be invested in assets deemed ‘less risky’ over the shorter term, such as bonds. Cash investments may also be used to provide liquidity for drawdown and tax-free cash purposes.

This still stands in principle. But when inflation is stubbornly high, as is the case today, then maximising growth can be challenging.

SEI’s investment team—the Investment Management Unit (IMU)—believe that prioritising equities to maximise growth still makes sense. Whilst fixed-rate bonds are clearly vulnerable in an inflationary environment, equities have the potential to act as a hedge. As inflation pushes the price of goods and services up, a company’s revenue and earnings may also increase. And it’s equity investors who may stand to benefit here.

Of course, investing in equities is by no means the perfect hedge—if such a thing even exists. The extent to which equities offer any degree of inflation ‘protection’ will vary by company and industry. And other macroeconomic factors—from geopolitics through to changes in sentiment—will naturally pose a significant risk to the investor.

This is one of the reasons the IMU believe active management plays an important role in investing for growth. In a more challenging macroeconomic environment, a gulf can open up between winners and losers. Having a portfolio manager who is potentially able to navigate this, by leaning into parts of the market they believe have the potential to outperform, could make all the difference.  

How does the SEI Master Trust put this into practice?

In a piece we published earlier this year, we described how our flexi default strategy has been designed by SEI’s Advice Team and the IMU, such that we’re able to target real, long-term growth for members, in spite of the current economic outlook.

Certainly, the IMU’s  knowledge and experience means we have a finger on the pulse during times of market volatility. The team actively monitor the sources of return we’re exposed to on a daily basis, pivoting away from those that underperform.   

What’s more, our glidepath reflects the IMU's view of equities as the best way to maximise growth, by keeping members invested in equities for longer than some other providers.⁵ Before the age of 51, members are entirely invested in the SEI Factor Allocation Global Equity Fund, which uses a diversified portfolio of global equity securities to target long-term capital growth and income.⁶

Importantly, this fund is actively managed by the relevant portfolio manager who is based in the IMU. In contrast to smart beta factor funds or exchange-traded funds (ETFs)—which remain static by design—we're able to tilt and adjust our factor exposures based on our economic outlook. 

The fund aims to achieve long-term growth of capital and income by outperforming the fund’s benchmark, the MSCI All Country World Index (ACWI), net of fees.

Figure 2 – An active approach to factor investing is attractive for a number of reasons 

Source: SEI. For illustrative purposes only.

What next?

The cost of living crisis is a painful reminder of an issue the pensions industry has long been grappling with—longevity risk. With the rising cost of everyday essentials, an increasing number of pensioners are likely living below the poverty line. Some may run out of money altogether. 

We take this risk extremely seriously—our glidepath not only supports members to retirement, but aims to bolster spending power in retirement.

(1) Jane Gill, ‘Tackling the cost of living crisis for older people: What the government must do’, Age UK, July 2023.

(2) See Pensions and Lifetime Savings Association (PLSA), ‘Rising prices add almost 20% to “minimum” cost of retirement’, 12 January 2023.

(3)The PLSA publish different numbers for those based in London.

(4) Whilst our ‘flexi’ default will be the focus for this commentary, we take the same approach/apply the same approach to all our lifestyle and investment options.

(5) For more information, see SEI, ‘Celebrating 15+ years of investment excellence’ (26 April 2023).

(6) Please note, all our lifestyle defaults make use of this fund.

Important information

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