Originally published March 2022.

It’s been five years since Neil Turner stepped down from a senior real estate position in the City. He’s been spending time writing fiction, enjoying the Suffolk countryside and the occasional visit back to central London. One recent trip formed the basis of his first article for us that appeared on 17 January. This is a follow-up piece about the alarming impact that the timing of investment returns can have on our pension pots.

When it comes to our pensions, what are the investment risks we should really worry about?

Volatility of returns?

Level of real investment returns?

Probably both, I hear you say, and, of course, I’d agree.

But what about the order in which investment returns occur through time?

A little esoteric, you might reasonably argue, even for a man sitting in the heart of East Anglia. However, for those of us with defined contribution (DC) pension pots (and this is a rapidly growing cohort, by the way) the answer to this question turns out to be critical to the level of our pension pots and, as a result, the quality of our retirements.

I’m not sure why the asset management industry isn’t more focused on this. Traditionally, of course, it has spent most of its time thinking about time-weighted rates of return (where the return in each period is given equal weight) as opposed to money-weighted returns (where each return is weighted by the amount of money it acts on). Historically, this was fine, given the dominance of (collective) defined benefit (DB) pension plans. 

Although time-weighted returns are simple and convenient, they are irrelevant for the world of DC pension plans; and this is why.