Choosing the right glidepath for the best possible retirement outcome

THE LIFELONG trajectory of investing, from aggressive wealth accumulation to wealth preservation and finally a sustainable income, is embedded in the glidepath of target-date funds, which are designed to meet plan members’ needs through the entire cycle. Glidepath construction is the most important step in target-date fund design because it has the biggest impact on plan members’ wealth. “Target-date funds provide plan members with an investment journey,” says Chhad Aul, chief investment officer and head of multi-asset solutions at SLGI Asset Management Inc. “We construct our glidepath to ensure a plan member takes an appropriate amount of risk to build assets during the accumulation phase, before transitioning to protecting their wealth and preparing for a later stage we call decumulation.” Managing this glidepath is an incredibly complex process, as investment managers make continual strategic adjustments for market and behavioral risk and investment mix at different phases of the glidepath.

They also have to account for broad social shifts. People are not only living longer, they also want to be more active during their retirement years, and that often requires more money for travel, recreation, health care, holiday homes, and so much more. Aul, together with colleague Jason Zhang, a portfolio manager at SLGI Asset Management, recently sat down with Benefits and Pensions Monitor to discuss glidepath construction for target-date funds and the important considerations that go into building a stronger retirement outcome. As experts in risk, it’s perhaps no surprise that Aul and Zhang have complementary definitions of risk and how it affects plan members.

very important during the decumulation phase. “We need to make sure that the assets that we’ve helped plan members accumulate for retirement can last for the longer and longer lifespans that we’re now seeing,” Aul says. “We don’t want to see people outliving their savings.”

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The first category of risk involves exposure to the markets. Markets fluctuate, and this can have a significant impact on a plan member’s wealth. “When people think about market risk, they tend to focus on the downside risk,” Zhang says. “That’s important, but we also want to ensure our younger plan members have the opportunity to grow their assets – because accumulating a strong asset base proves to be one of the biggest drivers when it comes to delivering strong retirement outcomes.”

In 2010 Sun Life Global Investments was purpose-built to combine the strength of Sun Life with some of the best asset managers in the world. Since then, we’ve become a trusted wealth-management firm for many Canadians – managing over $33 billion across a diverse selection of retail mutual funds, pension funds, and other institutional funds, including $10 billion in our flagship Sun Life Granite Target Date Funds (as of March 31, 2023). And as part of the Sun Life group of companies, we have access to a depth of resources, giving us (and ultimately our clients) unique advantages. We are driven by our goal to help plan sponsors deliver the best possible retirement for their plan members.

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$34B+

assets under management

$10B+

in Sun Life Granite Target Date Funds (Granite TDFs)

340,000+

Canadians saving for retirement with Granite TDFs

10+

years managing Granite TDFs

2nd

largest manager of active target date funds in CANADA

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“We need to make sure that the assets that we’ve helped plan members accumulate for retirement can last for the longer and longer lifespans that we’re now seeing”

Chhad Aul, SLGI Asset Management Inc

“We also want to ensure our younger plan members have the opportunity to grow their assets – because accumulating a strong asset base proves to be one of the biggest drivers when it comes to delivering strong retirement outcomes”

Jason Zhang, SLGI Asset Management Inc

Karen Adams

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Karen Adams

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Market risk

Published 04 Dec 2023

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Jason Zhang

Chhad Aul

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Experts Chhad Aul and Jason Zhang explain how to build a stronger glidepath – with a focus on retirement outcomes

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IN PARTNERSHIP WITH

Jason Zhang portfolio manager, SLGI Asset Management Inc.

YEARS IN THE INDUSTRY

Chhad Aul chief investment officer and head of multi-asset solutions, SLGI Asset Management Inc.

YEARS IN THE INDUSTRY

Sun Life Global Investments Leaders

First among the pre-retirement metrics is a utility score. This proprietary test reveals how a glidepath is performing in terms of generating a return over a certain threshold while at the same time assessing the exposure to downside risk. “A utility score tells us whether the glidepath is hitting the sweet spot between returns and risk,” Zhang says. A second pre-retirement metric assesses the strength of different glidepaths when it comes to generating wealth at retirement. “This is one of the most important metrics,” Zhang says. “We want to see a glidepath that gives our plan members the best chance of generating wealth at retirement. We are looking at thousands of scenarios here to ensure plan members are ultimately achieving the right balance of returns to enjoy a comfortable retirement.” The last pre-retirement test is referred to as the near-retirement drawdown test. This test focuses on the sequence risk for investors who are within five years of retiring, involves thousands of cross-asset scenarios, and measures the worst-case scenarios plan members may face as they near the end of their working lives. Sun Life Global Investments has two metrics that they use to address post-retirement risks. The first, the income-replacement ratio, is a number that represents how much retirees can reliably withdraw from their savings in the target date fund account on an annualized basis, measured as a percentage of their pre-retirement wage. This analysis also factors in government support programs such as CPP/ QPP and old age security (OAS). Finally, there’s the retirement resilience test, which assesses how many years assets in a retirement account are expected to last. Aul and Zhang emphasize that a lot more goes into designing a glidepath than just math and impressive metrics. “There’s a lot of science that goes into designing a glidepath,” Aul says. “But it’s an art as well. The five key metrics are highly quantitative and depend on a very robust statistical analysis. The art lies with assessing the relative trade-offs and finding the right balance.” Creating a robust glidepath is complicated. As today’s plan members live longer and look forward to a retirement free of worries and full of activities, target-date fund managers strive to deliver a glidepath and investment solution that will give them their very best retirement.

Sun Life Global Investments

Jason has over a decade of comprehensive experience in multi-asset portfolio management. This includes managing target date and target risk portfolios.

Chhad is responsible for the development and execution of the investment philosophy, process, and investment team managing SLGI Asset Management.

Susceptibility to risk increases as a plan member moves closer to retirement. Sequence risk is the risk of a plan member withdrawing funds from the target-date fund in order to invest more conservatively. Sequence risk is also important during decumulation because withdrawing funds during a bear market will create more risk to retirement income than withdrawing during a bull market. “This is one thing that we don’t want to see,” Zhang says. “We understand people tend to be susceptible to divesting during major market downturns, but this kind of behaviour usually leads to a worse retirement outcome.” It’s important when designing a glidepath that investment managers understand the scope of sequence risk and take this behavioral bias into consideration in their modelling and analysis.

Sequence risk

People are living much longer today than they did in the past. For example, individuals who retire at the age of 65 can expect to have active lives for about 25 years, if we consider mortality improvements. This is a long time to go without employment income, making investment returns

Longevity risk

With inflation at record highs, it is no surprise that inflation risk is an important consideration. Inflation can erode the real value of a plan member’s savings, and this needs to be part of the scenario analysis when constructing a glidepath.

Inflation risk

We’ve covered the main measures of risk that an investment manager needs to consider when designing a glidepath. But what goes into quantifying those risks and calculating their impact on retirement outcomes? Every investment manager employs a variety of stress tests to measure the different risks and assess the strength of their glidepath candidates. Aul and Zhang’s team have chosen five metrics designed to address the above risks, with a goal of delivering the strongest retirement outcomes possible. The first three apply to pre-retirement and the other two to post-retirement.

Stress-testing the glidepaths

2012

2014

2015

2017

2019

2023

Sun Life Global Investments Portfolio Management Team takes over portfolio management responsibilities of Sun Life Granite Target Date Funds (Granite TDFs) and diversifies our equity component with EM

2012

Increased equity across glidepaths and landing point, added TAA, and diversified our fixed-income component with High Yield Bonds and Emerging Markets Debt

2014

Diversified our fixed-income component with Private Fixed Income and Canadian Commercial Mortgages

2015

Increased equity across glidepaths and landing point

2017

Adopted a formal ESG policy, and diversified our equity component with Global Natural Resources Equity

2019

Multiple exciting enhancements – glidepath changes, further diversification, new retirement funds, and more. Read more here.

2023

Milestones

As of Sep 30, 2023; Source: Investor Economics Group Retirement Savings and Pensions Report, Investment Product Shelf Update, Q2 2023

Before becoming CEO of Fundserv, Karen Adams held a variety of leadership roles around the world – and she learned that listening and understanding are key to both providing service and developing talent

2012

2014

2015

2017

2019

2023

2012

Increased equity across glidepaths and landing point, added TAA, and diversified our fixed-income component with High Yield Bonds and Emerging Markets Debt

2014

Diversified our fixed-income component with Private Fixed Income and Canadian Commercial Mortgages

2015

Increased equity across glidepaths and landing point

2017

Adopted a formal ESG policy, and diversified our equity component with Global Natural Resources Equity

2019

Multiple exciting enhancements – glidepath changes, further diversification, new retirement funds, and more. Read more here.

2023

Milestones

2012

2014

2015

2017

2019

2023

2012

Increased equity across glidepaths and landing point, added TAA, and diversified our fixed-income component with High Yield Bonds and Emerging Markets Debt

2014

Diversified our fixed-income component with Private Fixed Income and Canadian Commercial Mortgages

2015

Increased equity across glidepaths and landing point

2017

Adopted a formal ESG policy, and diversified our equity component with Global Natural Resources Equity

2019

Multiple exciting enhancements – glidepath changes, further diversification, new retirement funds, and more. Read more here.

2023

Milestones

Three recent additions to the firm’s partnership discuss the different things that drive their burgeoning legal careers and the opportunities they enjoy

Chief Investment Officer and Head of Multi-Asset Solutions, SLGI Asset Management Inc.

Portfolio Manager, SLGI Asset Management Inc.

Chief Investment Officer and Head of Multi-Asset Solutions, SLGI Asset Management Inc.

All investment solutions are offered as segregated funds for group retirement plans exclusively by Sun Life Assurance Company of Canada, through Sun Life Group Retirement Services, a member of the Sun Life group of companies. SLGI Asset Management Inc. is the investment manager of the Sun Life Mutual Funds, Sun Life Granite Managed Solutions and Sun Life Private Investment Pools. Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc., all of which are members of the Sun Life group of companies. © SLGI Asset Management Inc. and its licensors, 2023. SLGI Asset Management Inc. is a member of the Sun Life group of companies. All rights reserved.

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