Magellan FuturePay delivers retirement income

What began as notes scribbled on a piece of paper a few years ago has finally come to fruition for Magellan Financial CEO Brett Cairns.

Magellan's chairman Hamish Douglass (left) and CEO Brett Cairns. Picture: Jane Dempster.

What began as some notes that he scribbled on a piece of paper a few years ago has finally come to fruition for Magellan Financial Group CEO Brett Cairns.

The $110bn global fund manager’s retirement income solution Magellan FuturePay delivers a predictable monthly income that grows with inflation and offers capital growth with downside protection underpinned by a reserving strategy, while giving investors daily access to their capital.

The actively managed fund will list on the Chi-X exchange at midday on Wednesday under the ticker FPAY.

It will also be offered as an actively managed fund via direct application with Magellan.

FuturePay’s target monthly income will, at inception, be equivalent to an initial yield of 4.25 per cent based on an initial net asset value of $5.75 per unit.

The monthly income will grow quarterly at the rate of inflation.

FuturePay aims to help investors and their advisers meet the challenges of establishing a regular income from their accumulated savings – a problem most relevant to those in retirement.

But it could also be used for endowments and estate planning to generate income for a beneficiary.

“People may have some savings from which they want to generate some known income to offset their own expenses – even school fees and so on,” Mr Cairns said.

“If you think about it from a retirement point of view, you’ve built up your savings and you’re hoping that will re-establish some sense of pay to cover your living expenses. Of course you need that to be sustainable because you don’t know how long you will need it for.

“So you want a fixed amount of income indexed to inflation, capital growth to offset longevity risk, and accessibility in case of additional needs. But these needs compete with each other.”

At the heart of the problem is market volatility.

It can work for investors in the “accumulation phase” as they add to their investments, potentially buying more shares in down markets. But in the “retirement phase”, when investors need fixed amounts from their savings, they are exposed to “sequencing risk”.

Volatility may force them to use a bigger part of their savings in a down market.

And they won’t benefit from “compounding” of that money as the market recovers.

“You could get nailed by the sequence of what happens,” Mr Cairns said.

One way people manage that volatility is via portfolios delivering growth with “downside” protection – which is what Magellan’s existing products are famous for.

Another is by “bucketing”, which means running a growth portfolio alongside a certain amount in a cash account which covers a given amount of income that people need.

“If markets are low, you can draw on that cash bucket without touching your invested assets, so you can be more invested when markets recover and fill up the cash bucket again,” Mr Cairns said.

It’s a reserving strategy that helps mitigate sequencing risk.

FuturePay aims to marry low volatility growth portfolios with a reserving function.

If the portfolio outperforms an inflation-adjusted index, a portion goes into the support trust.

If it underperforms, the support trust is used to support the monthly distribution.

The support trust is a discretionary trust for the benefit of FuturePay, but isn’t owned by FuturePay. The reserving strategy is the “secret sauce” worked out by Magellan’s head of retirement solutions and data, Paddy McCrudden, and is something that makes the product unique.

The key is that FuturePay’s reserving function is done in a disciplined way to remove biases.

Independent actuaries Rice Warner found the benefits of this approach are real.

“Investing in FuturePay provides considerable uplifts on both income and accessible capital through retirement,” Rice Warner said in a Review of Retirement solutions on May 5.

“One of the things that came out of that was that the reserving processes – when done by planners, it can be pretty good, but it’s a bit ad hoc.

“When do you take money out and reserve it? When do you draw it back?

“People have biases … you might fall in love with CBA stock or something and not take some of the top and reserve it when you probably should, perhaps.

“Being disciplined about that does add something to it and as far as I can tell there has been no research anywhere in the world about dealing with this problem in this way.”

Mr McCrudden will be the portfolio manager of FuturePay.

But the final product isn’t too far away from the notes Mr Cairns scribbled down some years ago.