There have been some dramatic changes over the last few years in the way we look at investing for retirement.Occupational pensions now have a requirement for a statement of investment principles. A Sip – not be confused with a self-invested personal pension – is a document which describes the way in which the trustees will invest the scheme assets and normally covers things like the nature of the scheme’s liabilities, the types of assets which the trustees consider to be appropriate to meet these liabilities and the range of asset allocations which the trustees are planning to use. Note that Sips are required for defined-contribution schemes as well as defined benefits. If a member chooses to read the Sip, it should limit the scope for surprises when investments move sharply. Knowing the asset allocation underlying a person’s pension may also influence their investment decisions elsewhere. If someone has a huge exposure to equities through their pension, they may be less inclined to invest in equities in their non-pension investments. Ten years ago, it was widely accepted that the best assets for a DB pension were those plugged into the real economy, for example, equities or property. All that has changed for at least three reasons. First, when accountants were drawing up the rules for Financial Reporting Standard 17, they sought historical evidence to show that equities moved in sympathy with salaries and found none. They concluded that bonds were a more appropriate match. At the same time, the Government was requiring ever higher proportions of DB pensions to be guaranteed, implying bond-based investments. In 1997, bonds also gained a tax advantage over equities for pension investments because of the abolition of advance corporation tax dividend relief on equities. Bonds yields are still received tax-free by tax-approved pension arrangements. For DB schemes today, the latest fashion is liability-driven investment. At its simplest, LDI is the principle that one should invest to produce cashflow which matches the cashflow of one’s liabilities. This begs the question of why we have not been doing this all along but the future cashflow from an equity investment is variable and hard to predict. Most funded DB schemes have significant deficiencies on whatever basis you care to measure them. In these circumstances, you can make the cashflow of your assets adopt a shape which matches the liability cashflow but the assets are inadequate to match the liabilities in size. To correct for this shortfall, you may need to make assumptions about the size and timing of further contributions but you can only guess the terms on which these will be invested. The investment arguments are different for DC schemes. Unless the investment mechanism is an insurance policy containing guarantees, the investment policy may be less constrained and often the member will be able to select investments within wide limits. The investment will normally be in some kind of pooled fund to achieve diversification and economies of scale. However, some people want concentration of investment plus direct control of the underlying assets, so choose a self-invested personal pension. For both DB and DC, it should be normal to tailor the nature of the assets to the nature of the liabilities. With DB, this is LDI. The DC equivalent is lifestyling, that is, a gradual switch from equities to bonds and cash as retirement approaches. If a member plans to defer retirement or wants to continue equity investment after retirement, they should override the lifestyling default. The real test is what happens when markets move sharply in an unexpected direction. Some people were arguing before the recent market falls that all the main asset classes were fully valued. If some fall sharply but others do not, we will find out if people really understand the investment risks they are taking.