The biggest threat to investors’ pension pots is not taking enough risks over the longer term, according to Neptune’s Robin Geffen (pictured). 
The manager, who runs seven funds including Neptune Global Alpha and Neptune Balanced, says that many savers place too much emphasis on the risk that their pension pot will rise and fall over time, as opposed to whether they will find themselves with enough cash to tide them over when they actually retire.
As such, Geffen argues that investors should be looking at higher risk asset classes, such as equities, regardless of macroeconomic noise if they are investing over the long-term, particularly if they are younger and have a longer time to hold assets before retirement.
“I believe that investors are simply not willing to accept enough volatility in the price of their investments when younger in life. For those of us who are still some way from retirement, we must remember that our pensions are going to have to deliver the income we need for a prolonged period of time,” he said.
“We are now in a very different age to the one 20 and 30 years ago, when your retirement was determined by the profitability of your employer, rather than the success of your own pension contributions. Your retirement now does not depend on how many years you work as an employer, it depends on how your pension pot performs for you.”
Geffen’s argument is similar to that of legendary investor Warren Buffett who, in his annual letter to Berkshire Hathaway shareholders, wrote that many savers wrongly volatility and risk as the same thing.
“If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in ‘safe’ treasury bills or bank certificates of deposit,” Buffett said. “People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement.”
In the current environment where growth is sluggish and rates on cash are low, Geffen argues that investors simply cannot afford to miss out on years of potential double-digit returns that could be gained from holding stocks.
“We will require substantial pensions to take us through long, happy and active retirements in the manner to which we would like to become accustomed,” he added. “Now, as you approach retirement, the life span of your pension fund has been expanded by at least 15 or 20 years.”
Another macroeconomic factor that investors must bear in mind is the low inflation rates of recent months, according to Geffen.
Many UK investors became particularly concerned when rates hit zero in February this year and subsequently became negative in April.
Despite becoming positive once more in May and returning to a rate of 0.1 per cent, inflation fell to zero again in June, according to figures released by the Office for National Statistics yesterday.
Geffen believes that this creates an even stronger case for investors to hold equities in their pension pots as historical patterns show that stocks are the best investments to beat inflation over the long term.
Performance of indices over 25yrs
Source: FE Analytics
“I believe that rather than experiencing a long period of stagnation, the world economy is growing solidly. This will ultimately mean inflation will return,” he explained.
“The long-term pattern of returns teaches us that shares are the right investments to beat inflation over the long term.”
The manager showed that between 1900 and 2015, the real value of global equities with income reinvested grew by a factor of 325, compared to just 8.4 for bonds.
According to FE Analytics, the MSCI World index has vastly outperformed the IA Global Bonds sector average over one, three, five, 10 and 20 years, delivering a total return of 282.89 per cent over 20 years and outperforming the sector average by 140 percentage points.
Performance of index vs sector over 20yrs
Source: FE Analytics
Adam Laird, passive investment manager at Hargreaves Lansdown, agrees that equities are favourable when holding them over the long term, particularly when the investor is young.
“Obviously for a young person, one of the biggest advantages they have is that they have a long expected time horizon,” he said.
“You can expect 30 or 40 years, possibly longer, of investing, and that gives enough time to be able to spare quite a bit of risk in the portfolio.”
“For younger people it’s important that they look at long-term issues like funding their retirement or other issues that are going to come up further down the road – often responsibilities grow as life goes on. So this is the time to take advantage of the higher returns that you can get from equities for example.”
He admits that it is challenging for younger people to begin thinking about investing into a pension pot at the moment, particularly if they have immediate spending needs such as student loan repayments or are saving for a house deposit.
Darius McDermott, managing director of Chelsea Financial Services, agrees that it is a difficult environment for younger people to begin investing in pensions, particularly when they are at the start of their career and earning less.
However, he warns that it is now more important than ever for people to consider the investment options for their pensions as soon as possible, due to longer life expectancy and an ageing population.
“In aggregate, as a country, if you look at how much of the population actually save into investments, I think it’s probably quite small,” he continued.
“At the moment, cash is paying such low rates, the risk is inherent in that. I think people do take too little risk at first, but I can understand why. I think most people will start with cash which is a safer asset, but even with zero inflation and cash paying half a percent, that is barely a real return and inflation won’t be zero for much longer.”
“I am not keen on cash for any form of mid- to long-term saving. You should always keep a cash emergency fund. Then, if you’re thinking about longer term savings, and given that people are living longer, they should most definitely be allocating to higher risk assets.”
“Bonds were good for the 30-year bull run. They are indeed a safer asset and historically, they’ve actually given a decent return. But I think as we sit here and look at the situation today, I would be much more in favour of equities.”
