Flexicurity is the concept that individuals need both security and flexibility when approaching retirement investment decisions. See EDHEC-Risk Institute.
Annuities, although providing security, can be costly, they represent an irreversible investment decision, and often cannot contribute to inheritance and endowment objectives. Also, Annuities do not provide any upside potential.
Likewise, modern day investment products, from which there are many to choose from, provide flexibility yet not the security of replacement income in retirement. Often these Products focus solely on managing capital risk at the expense of the objective of generating replacement income in retirement. In short, as outlined by EDHEC-Risk, modern day Target Date Funds “provide flexibility but no security because of their lack of focus on generating minimum levels of replacement income in retirement.”
Therefore, a flexicure retirement solution is one that provides greater flexibility than an annuity and increased security in generating appropriate levels of replacement income in retirement than many modern day investment products do.
EDHEC offers a number enhancements to improve the outcomes of current investment products.
One such approach, and central to improving investment outcomes for the current generic Target Date Funds (TDF), is designing a more suitable investment solution in relation to the conservative allocation (e.g. cash and fixed income) within a TDF. Such an enhancement would also eliminate the need for an annuity in the earlier years of retirement.
From this perspective, the conservative allocations within a TDF are risky when it comes to generating a secure and stable level of replacement income in retirement. These risks are not widely understood nor managed appropriately.
The conservative allocations with a TDF can be improved by being employed to better matching future cashflow and income requirements. While also focusing on reducing the risk of inflation eroding the purchasing power of future income.
This requires moving away from current market based shorter term investment portfolios and implementing a more customised investment solution.
The investment approach to do this is readily available now and is based on the concept of Liability Driven Investing applied by Insurance Companies. Called Goal Based Investing for investment retirement solutions. #Goalbasedinvesting
The techniques and approaches are available and should be more readily used in developing a second generation of TDF (which can be accessed in some jurisdictions already).
This is relevant to improving the likely outcome for many in retirement. With this knowledge it would help make finance more useful again, in providing very real welfare benefits to society. #MakeFinanceUsefulAgain
For a better understanding of current crisis of global pension industry and introduction to Flexicure see this short EDHEC video and their very accessible research paper introducing_flexicure_gbi_retirement_solutions_1.
This is my last Post of the year.
Flexicure, is my word of the year! Hopefully, we will hear this being used further in relation to more Robust Investment Portfolios, particularly those promoted as Retirement Solutions.
As you know, my blog this year has had a heavy focus on retirement solutions and has drawn upon the analysis and framework of EDHEC-Risk Institute.
In addition, the thoughts of Professor Robert Merton have been important, particularly around placing a greater emphasis on replacement income in retirement as an investment objective and that volatility of replacement income is a better measure for investment risk for those investing for retirement.
I have also noted the limitation of Target Date Funds and how these can be improved e.g. with the introduction of Alternatives.
Nevertheless, the greatest enhancement would come from implementing a more targeted cashflow and income matching portfolio within the conservative allocations as discussed above.
Wishing you all the best for the festive season and a prosperous New Year.
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Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.