How to consider DB pension value in asset allocation

[Minnow2]

Hi,

I currently invest in low cost index trackers and rebalance the asset allocation annually to hold my age in bonds as a %, e.g. age 40, 40% holding in bonds, 60% equities.

I was in a good DB scheme for 15 years and would like your thoughts on how to consider the value of the pension as part of my allocation. As far as I can see there are 2 options:
1. Consider the value of the pension as a bond investment and adjust my investment asset allocation appropriately to maintain the desired bond/equity split
2. Ignore the pension for the asset allocation, but use the future value of the retirement income stream to reduce the pension target, i.e. the amount I need to save separate to my pension to get by comfortably.

My gut feel says the former is the most logical way to consider it. Thanks in advance for any advice.

 

[Marc]

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[Brendan Burgess]

The “traditional” rule for age based bond allocations is 100% stock less current age but as an asset allocation model it’s not great,

Agree fully.

You should look at all your assets together and not just your pension assets. At age 40, your home is a property exposure, nd the rest should be in equities. Given that you have a defined benefit scheme and assuming you have a home, the rest of your assets should be in equities.

Brendan

 

[Sarenco]

I agree with Marc that it's best to think of a DB pension as a corporate or government bond (depending on who has made the pension promise) and to work from there in terms of determining your asset allocation.

The financial stability of the promisor (which could change over time) is obviously important in terms of determining the credit quality of your "bond" - there are plenty of examples of pension promises that came to nothing.

 

[Minnow2]

The “traditional” rule for age based bond allocations is 100% stock less current age but as an asset allocation model it’s not great, especially if you intend to ARF in retirement you’ll end up being too light in equities.

I understand that it is a conservative model and have been considering reducing the bond portion. Could you please explain the link between my investment strategy now and whether I will choose an ARF in 25 years time.

Thanks

 

[Marc]

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