Karen Watkin
Welcome to AB's Alpha Females, the Multi Asset Investment podcast from Alliance Bernstein. I'm Karen Watkin and I'm a fund manager in the Multi Asset Solutions team Here at AB. The Alpha females are those women who have developed unique areas of expertise and made their mark in the investment industry. For many clients, generating income from their investments is a priority. But market conditions are very different now from those that we've had over the past decade. So, taking a flexible approach to income and getting original and informed perspectives to investing is more important than ever. In this series, my guests, the Alpha Females, share their expert insights on the key questions for investors on the hunt for income. They'll also be telling me about their career journeys, the challenges they faced and the lessons they've learned along the way. They say that getting old isn't so bad when you consider the alternative, and luckily more people than ever are enjoying that privilege. According to the UN, within 20 years, for the first time in human history, the number of older people in the world will surpass the number of children. This is the product of a long-term decline in both mortality and fertility rates. And thanks to improvements in healthcare and medical technology, we're seeing the average age of populations rise across the globe. On top of that, we find ourselves in the midst of unprecedented global change, such as technological advancements, climate transition and political turmoil, where financial uncertainty looms large. These complexities present a unique dilemma for investors seeking to secure a stable financial future for those approaching retirement. So how do you navigate this complicated landscape, taking into account both short term challenges like economic fluctuations and more volatile markets, alongside long-term trends like shifting demographics, saving behaviours and working patterns? What are the economic and cultural factors that need to be considered when saving and investing for later life? And what innovative investment tools can be applied to help deliver safe and sufficient income in retirement? To answer these questions and others, you need someone like Elena Wang. Elena is a Portfolio manager with AllianceBernstein. She's worked on AB's defined contribution pension solutions for almost a decade and runs investment strategies designed specifically to meet people's needs in retirement. Elena, welcome to the podcast.
Elena Wang
Thank you for having me.
Karen Watkin
So, before we dive in, I think it might be helpful if you can perhaps provide a little bit of context in terms of some of the big changes we've seen across the pension landscape over the last couple of decades, and in particular what we've seen in terms of this shift from defined benefit pension schemes, where the employer was really responsible for delivering a pension to an individual, to where we are today, where Most people are in defined contribution schemes where really the responsibility now lies with the individual in terms of what financial outcome they're likely to see in retirement?
Elena Wang
Sure. So basically, you have three sources of income for retirement. One is a defined benefit, the plan that is sponsored by the employer that provides guaranteed income for you for retirement. There will be Social Security benefits, which are the guaranteed benefits from the government, and then your personal savings in individual retirement accounts. But that landscape has shift over time. While we still see many of the public plans continue to provide the defined benefits, many of the corporate plans actually try to shy away from it gradually. So that really put pressure on both the participants, their plan sponsor, as well as investment manager, to work really hard to make sure they save enough for their retirement.
Karen Watkin
And so, what are some of those new challenges now facing people that are perhaps approaching retirement, but also for younger savers and what their retirement might look like now that really a lot of that responsibility has moved to the individual?
Elena Wang
I think there are basically, I think, two challenges. One is the shifting demographics. Another is the challenging marketing environment. In terms of the shifting demographics, people now live longer. That means that we need to save more to cover increased cost for potential longer retirement. I want to put that into context because many of us may live beyond 100 years old, right? Actually, in US today, the people that is 100 years and older, they're about kind of 100,000 people there today. And we expect the number to be quadruple in the next 30 years. That means that Karen, you and I, one of us, or maybe both of us, will be lucky to live, you know, long enough until age 100 or even beyond. But to me, I'll be also worried about do I have enough savings to last that long and really enjoy that retirement. And if you think, if you do the math right, if we live until age 100, retire at age 65, that means we're going to retire for about 35 years. That is pretty much equivalent to the number of years you're going to be working. Right. If you think about working until from like age 25 to 65. So that is shocking to me when I look doing the math. So, people really need to think about having the assets to generate growth not just in working years, but potentially also past the retirement age. So that is one challenge. Another one is the market doesn't make it easier for us. If you think about the past decade, people enjoy, you know, low interest rates, low inflation, strong equity market. But we do believe the next 10 years will be quite different. We expect much lower nominal return from equity driven by the uncertainty around the global economic outlook. And secondly, we expect potentially higher inflation. So, they really kind of, you know, weigh on the potential real return people can generate in their assets. And last but not least, we're also expecting high volatility in the market, in the geopolitical risk, as well as the uncertainty around inflation, around policy, as well as the recent tariff issue. So, it's really kind of a conundrum for both the participants and the investment manager to be making sure they need to generate growth for longer retirement, but at the same time control the risk because of the more volatile market.
Karen Watkin
So as an investment manager, how do you think about providing solutions to answer that question?
Elena Wang
Essentially, I guess there's two folds. One is that from an investment measure perspective, given these changes and challenges, we need to think about potentially designing a solution that is more growth oriented, but at the same time want to make sure balance that the need of generating growth with the need to control risks because of auto market. But I think that way we shouldn't really rely on predicting the market and passively react to it but thinking more about proactively and design the solution that can work under different market environments.
Karen Watkin
You know, you're ultimately trying to invest for people potentially over a 50-year horizon. Right. If they start working in their 20s, it's a long time until they approach retirement. So, if you're trying to build one investment solution to meet those needs, what is that glide path that helps them navigate that kind of investment journey on the way to retirement?
Elena Wang
Sure, maybe. Karen, I think it might be worth helping provide some definition on what is glide path. Is a glide path referring to how a portfolio's allocation to equity evolves over time. It typically starts at high level. So, for younger cohorts, the allocation to equity is typically around like 90% or 95% of your retirement portfolio. And as participants, you know, ageing that level of acquisition, we are gradually gliding down, really driven by, you know, two things. One is the participants’ objectives evolve over time. And secondly, participants risk tolerance evolves over time as well. Right. If you think about younger cohorts, their objectives is really generating as much growth as possible and their risk tolerance is very high because they have high, they have long investment horizon, they don't need to withdraw money from their account. But as participant is getting post-retirement, their investment horizon gets shorter. They have more money in their account. So, any market movement could hit their mark, could hit their portfolio and have a much bigger dollar amount impact on their account balance. And also, when they move into retirement, we will start to withdraw money. So that's the reason that gradually we should not just dial down the risk taking, but also allocating more to diversifying asset classes like, you know, inflationative exposure.
Karen Watkin
That's something I wanted to ask you about because as you've described with the glide path, there's clearly that important accumulation phase where individuals are working and they're saving part of their salary and investing it to kind of grow that potential. But then the next piece of the equation is kind of once they actually reach retirement and how do they trans transition to taking that as income? How else do you think from an investment perspective about making that shift from the kind of accumulation phase for a saver to what they need to think about then when they're wanting to draw income?
Elena Wang
I think it's important to help the participant to have the tool they can use to estimate the income they can take out. Right. Because if you think about kind the old regime where we have the defined benefit, the employer will provide you the guaranteed income for life. You don't need to worry about whether how much I should withdraw, whether going to last, you know, until, you know, through the entire retirement. Nowadays, because now people rely on the defined contribution which they will have account balance of X dollars. But the question try to solve is that how much I can withdraw from this account on an annual basis and making sure it can last until say age 80 or 90. So one of the ways we're actually doing is that, you know, we're providing tools for our participants that they can key in their information about their retirement age, their account balance and then tool will return you kind of estimated income you can take annually in retirement and how long you are likely to last. You know, there's an analogy we really helping participants climb the mountain during accumulation phase and doing the hard job. And when they’re reaching the top, there's a cliff and we leave them to do themselves by themselves. We don't tell them what's the solution, how to get done. So, the decommission phase is really important. Either providing a solution to help them provide them with the income for life or giving them a tool that they can estimate and help plan accordingly for their retirement.
Karen Watkin
And like you mentioned earlier, actually, you know, obviously a critical part of that is actually still keeping them in some of those growth assets even through retirement, so that they can keep compounding and kind of, you know, having that growth element to their pot as well as they're withdrawing some of that money as, as income. So I think it's really Interesting how you think about building those portfolios and almost the different roles that you know, the different asset classes and strategies that you incorporate, provide, provide. You mentioned I think around some of the kind of diversifying measures of defence that you've put into the portfolio. But one of the things we've discussed on some of the other episodes of the podcast is that shift that we've seen in terms of the kind of market regime and in particular what we've seen in terms of things like bond volatility and the impact of higher interest rates and higher inflation. How do you think about that kind of longer-term strategic view? But in the context of what, you know, markets are doing today, we definitely.
Elena Wang
We expect to enter into a different market environment as we just discussed. So, one key thing I think I want to highlight is that people really need to think about having more diversification in their portfolio. Because if you think about kind of the typical, the old school tool that people use for retirement is a simple stock and bond portfolio, going forward the market is, will be different. So, you need to think about where you can further diversify the portfolio. Even looking at the long term, we believe that the correlation between stock and bond can potentially, you know, close to zero or slightly positive. So that is one thing. Another diversification we want to really highlight. The reason is that the public market is not only become very highly correlated, also becoming very concentrated. If you think about kind of S&P Hub 500, right, it sits 500 names in the portfolio, but mostly it's driven by those Max 7 names. So, you need to think about how I can get additional exposure and diversify the portfolio. That's kind of the reason when we think about diversifying for our client, there are, you know, two ways. One is think about liquid assets like defensive equity, you know, global bond. And the other way we actually try to explore, actually getting a lot of tension in these years is the private assets, if you will, which we all know have been used in the defined benefit plan for decades and proven to be adding value net of fee and why not having that in the defined contribution plan? Because now people have less access to defined benefit and more rely on defined contribution.
Karen Watkin
We have talked a lot about obviously the huge importance of getting the right investment strategy in place for individuals as they save for their retirement. But obviously one of the other big factors is how much those individuals choose to save and put into their pension plan. What have you seen in terms of differences in terms of how different regions or individuals think about that savings environment? Because we're looking at building those investment solutions but we don't necessarily know what the individual might be saving. How do you think about the savings piece part of that equation?
Elena Wang
I think that a lot of factors can have impact on the saving behaviour. One big thing is the culture. Just taking myself as example, I was born and raised in China. My grandparents taught my parents the concept of saving and in their generation not necessarily saving for retirement but more kind of saving for the rainy days. And then my parents’ kind of pass that habit down to me. So, I started saving, you know, when I started working. So, I saved pretty early. But that could change from generation to generation because when I see you know, my next generation they tend to save less and enjoy more their current life which I think is good. But that kind of the dynamic actually shifting from generation to generation and if you take one step back looking at just within one culture. Right. The regional factors could also have impact. I was reading kind of one of the survey and they find that just within us certain regions people tend to save more than the other regions. One thing they highlight is that for example the East Coasters tend to tuck way more money for retirement than those living the west coast. We don't really exactly know why but some of the assumptions is that potentially is kind of the different level of the median salary level, the potential tax burdens they may have and the cost of living. I think what that really kind of have implication for investment managers is that when they're looking at their plan populations they were looking at the population with quite unique demographics. Either driven by their employment, driven by their culture or driven by the regions they are located in. So when think about providing the solutions for their participants a potential customised solution should be considered and maybe provide better outcome than a typical off the shelf.
Karen Watkin
Product because you can then take into account things like those savings behaviours, perhaps the length of the working life of the members, et cetera.
Elena Wang
Exactly. Having a customization doesn’t have to be on an individual level but if you can do customization at plan level that could also be tackling most of the demographic differences already.
Karen Watkin
So, tell me Elena, how did you come into the world of pensions? What first drew you into this part of the investment management industry?
Elena Wang
It's actually interesting path. AB is the firm that actually draw me into the retirement space. I have always had a quantitative background and always working in the multi asset space but when I was looking for kind of a new job AB had this opportunity kind of retirement solution. I didn’t really have knowledge there when I first joined, but I'm like, why not? It's interesting. It will have a real impact on people's life and retirement goals. So let me give it a try. So that's kind of how I get into this, and I have to say I find this really rewarding the way you see how my work have real impact. The participant in real life I think is kind of go beyond the professional responsibility is also kind of my personal mission as well. And try to empower people to enjoy their golden years with dignity and comfort. And witnessing people actually having peace of mind for retirement is just kind of inspiring me to think that my hard work is really worth the time and efforts and inspires me to continue to do the great work I have been doing.
Karen Watkin
I love that Alina, and I think it's so great to see actually the huge impact that investment management has on people's lives. I think sometimes it can feel one step removed from the real world. But as you say, actually what you're delivering for your clients is about that dignity and financial security in their golden years. I just love the way you said that. So before we wrap up, Elena, what would you say are the three critical things to remember when building a portfolio for a healthy retirement?
Elena Wang
I would say the first one, and I would think this is the most important one is making sure you're safe for retirement and safe as early as possible. As an investment manager, there's nothing we can do if you have no money for us or no s for us to manage. So save for retirement and save early. And secondly is that when you think about construct a portfolio for retirement, it's important to know that your objectives and your risk tolerance do evolve over time as you enter into different life stages. So you have to frequently reassess your portfolio, your situation based on your age and your financial condition and adjust your portfolio accordingly. You can do it by yourself or you can. You can choose like default option like targeted fund which will help to evolve those allocation is on your age accordingly automatically for you. The second, the third I think I want to highlight that we're really experiencing evolving market condition and a shift in the retirement landscape. So I think it's important to really think beyond stock and bond and leveraging additional diversifications as well as non traditional tools that can potentially better navigate us through what we expect a more challenging environment going forward.
Karen Watkin
I think those are great insights and I think you've done such a great job of articulating actually how complicated it can be to deliver a successful retirement outcome. But actually as an investment manager, we have lots of tools and insights at our disposal to bring that to our clients. So thank you so much for sharing all of that with me today. Alina, it's been an absolute pleasure having you on the podcast today.
Elena Wang
Thank you so much for having me. It's a great pleasure to share the insights and discussing about the interesting topics of retirement.
Karen Watkin
Thank you.
Elena Wang
Thank you for having me.
Karen Watkin
So I think that conversation with Alina was fascinating. I think there's so much we need to think about when we're considering retirement, not least this idea that, you know, some of us are going to be living to more than 100 and we may have more than 30 years of retirement that we need to try and make our money last for. The second thing that really struck me was the this idea she shared about it's not just about investing through that growth phase. It's not just about how do we help invest our clients money for them to accumulate that pot ready for retirement. It's then also about how do we help them make that transition and ultimately translate that pot of savings they've accumulated actually into something that's a sustainable income to support them through their later years. And then the final piece that I thought was really important was how she's described the market conditions. We know that there is much more volatility for investors to navigate today, but we also know that we're seeing a backdrop of higher inflation and high interest rates. And so that all needs to be taken into consideration. And you need to be very thoughtful from an investment perspective about how you can both take enough risk to grow those savings accordingly. Investing in things like the equity markets, but also investing in parts of the market that will do better when inflation is high, as well as thinking about those assets that will ultimately generate income for you in retirement. So it's a really complex, multifaceted problem. But as Alina's described, when we think about it in this way, we can ultimately deliver really fantastic outcomes for people in their retirement years. And that brings to a close this episode of AB's Alpha, the investment podcast from Alliance Bernstein with me, Karen Watkin. If you've enjoyed this episode, don't forget to tell your colleagues and friends about it. It only remains for me to thank Alina Wang for joining me today. This episode was produced by Richard Myron from Earshot Strategies.
