Investec Structured Products’ David O’Brien explains why structured products are playing a greater role in retirement planning
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As the hunt for new forms of growth and income in pension portfolios intensifies, Investec Structured Products used the RP Forum to explain why structured products could be the solution.
RP got the lowdown from David O’Brien, the firm’s Midlands & East Anglia business development manager, in an exclusive interview after the event.
How do structured products aid retirement planning?
With the FTSE 100 index trading at 29 times historic earnings and dividends insufficiently covered, having a wider variety of assets in a portfolio is a sensible approach to achieving retirement income. Structured products increase portfolio diversification because they are less correlated.
Our research has indicated that consumers’ ability to understand structured products and comprehend their returns is surprisingly good. This is really encouraging as structured products have a much greater degree of predictability than other asset classes.
Which phase of retirement planning are they suitable for?
Until recently, investment product sales have been mainly in growth-oriented products, which indicates a focus on the accumulation phase. The industry is now seeing a migration of assets to the decumulation phase because there is no longer the necessity to buy an annuity.
This is where structured products have a greater role to play. Assets in the accumulation phase are based on an investment horizon of 10, 20 years and beyond, so long-term assets held in open-ended products, such as OEICS, will be core holdings.
For people at or in retirement, the idea of a 10- to 20-year investment horizon with no need for capital has ceased. They need a shorter investment time horizon and have specific capital and income requirements.
Structured products are useful because they have specified terms and are created for different risk profiles.
What role do they play in balancing risk with returns?
If an adviser wants part of a portfolio to be as cautious as possible, they can opt for a structured deposit. It is one of the safest assets in the market and usually benefits from FSCS deposit compensation.
There are also structured investments available that carry counterparty risk, with the potential for higher returns. From these, a tailored pension portfolio can be created.
There are two products of most interest to the near and in retirement markets:
• Income producing products. These are structured products that take the FTSE 100 and change it into a
product with a high degree of capital protection and a reliable stream of fixed returns for five to six years.
• Defensive growth products. In the past, structured products gave a return if the index increased over a specific term or by the time of the kick-out option. We currently have indices trading at or near their peak, so products requiring the index to increase are less relevant.
Products have been launched that provide a return if the index has not fallen by a certain amount when it matures or kicks-out.
Our current FTSE 100 Step Down Kick-Out Plan pays 7.75% per year if the index has not fallen by more than 20% at the end of the term.
A more defensive version pays 6.5% per year if the fall is not more than 35%.
How do you think the market will develop?
We’ve already seen in the past few years a greater variety of structured products within the market, particularly with defensive profiles.
This is largely in response to equity valuations remaining stretched, so the demand for products producing attractive returns without relying on an increasing index will continue to become more popular.
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