Why we invested in Grandhood, the startup trying to solve retirement savings
I was first introduced to Grandhood by my former colleague and fintech entrepreneur Johan Lorenzen. Having built a relationship with the company for a while, we decided to back the founders in their mission to solve pension savings. We recently announced that we led their recent seed round, co-investing with our friends at Denmark-based SEED Capital and Austrian-based Speedinvest.
I’m relatively confident in my financial literacy. I have been a venture capitalist for the last 15 years and an asset manager for 10 years prior to that. I have a master’s degree in finance. Yet I have a hard time figuring out my own pension plan and I confess that I simply do not understand a lot of our pension systems. People much more educated on the topic seem to have the same problem. The Bank of England’s chief economist, Andy Haldane has confessed to not being able to make the slightest sense of pensions and perhaps even more damning, his many conversations with experts and independent financial advisors confirmed to him that they don’t have a clue either. The reality is that most individual pension savers are not equipped for sound financial planning and neither, as it turns out, are their advisors. Considering the choices between the myriad of bundled savings and insurance products, understanding the mind-boggling impact of compound interest, figuring out what your investments strategy should be, what the fees really represent, and objectively attempting to predict your life expectancy are some of the hurdles. It sounds complicated, and it really is. Trying to make sense of all of this is overwhelming to most, and no wonder most pension savers find one of the most important long-term decisions in their life pretty dull.
Why is this a problem?
Over the last 20 years we have experienced a gradual shift from generous defined benefit pension schemes crafted by our governments or corporate employers towards defined contribution plans, with individual accounts managed by pension funds or the future pensioners themselves in a ‘what-you-pay-is-what-you-get’ framework. With an ageing population, our governments and corporates cannot pay the bill of retirement. In the future the financing of your retirement is entirely up to you!
As always, there’s some good and bad news.
The good news is that in most OECD-countries, you won’t live through your retirement below the poverty line. Most will have a so-called ‘redistributive pension schemes’, in the form of basic pension, social assistance or other forms of support. Furthermore, most countries also have second tier ‘insurance’ pension scheme in place that aims to ensure that retirees have an adequate replacement rate, which is the retirement income relative to income, before retirement.
The bad news is that the basic mandatory pension schemes awards you a 25% replacement rate if your income is above average, and at best, a 50% rate if your pre-retirement income is significantly lower than average. You better have some savings in place or be prepared to significantly change your lifestyle upon retiring.
If you are lucky enough to live in my home country Denmark, the chances are that you have been contributing an average 12–15% of your annual salary to one of our many occupational pension funds, created via collective bargaining agreements during the last 20 years. According to OECD forecasts this means that many Danes can expect replacement rates in the 70% region. It’s probably worth pointing out that Denmark might not rank #1 in GDP/capita but we do rank #1 in pension savings/capita in the world. You’re well covered if you are part of a collective bargaining pension scheme. If you are self-employed like myself, if you are an entrepreneur or work for a small company, or if you are part of the gig economy, you’re covered only if you planned that yourself. Grandhood is targeting this segment with a simple, transparent and low-cost pension savings product. With this solution, they are targeting approximately one third of the population in the #1 pension nation in the world. Needless to say, Denmark is a great place to start but the market opportunity is even larger in a lot of other countries.
At Sunstone, we back exceptional founders on a mission to change things that matters. Given the elderly demographic timebomb — retirement savings is right up there on the list. Jon Lieberkind, Jens kam and Mathias Bredkjaer, the founders of Grandhood, are determined to fix retirement savings with an honest and simple occupational pension product that customers actually understand. With collective experience from investment advisory and risk management from Bank of America Merrill Lynch, Danske Bank and SAS Institute, the founders know what can be done better without charging absurdly high fees in the process. They are revolting against the current antiquated pension advisory business model which demands high fees in return for questionable advice.
Surprisingly few startups have addressed this massive market opportunity. We have been looking for investment opportunities in the category and have used three straightforward product criteria to assess companies in the space. These criteria are low-costs, transparency and offerings that are both engaging and educational. Grandhood is the first pension startup we have come across that has all three.
Like most VCs, we have been considering the vast numbers of low-cost, self-serve, robo-advisory startups. They tend to target ‘individual taxable accounts’, with algorithmic asset allocation based on ETFs issued by the usual suspects; Vanguard, Blackrock or State Street. However, given the low-cost environment these are generally grossing below an annual 100 basis points on the dollar. The consequence is doubtful unit economics with an average 2–3 years cash payback on customer acquisition costs. Competition in the segment is high and the assets under management are harder to scale. Hence, while promising, we have refrained from investing in any robo-advisory startups so far. Compared to individual taxable accounts, pension savings startups look more compelling. An occupational pension plan provides a stream of continuous contributions and given that they are often tax incentivized, they are also significant in size relative to the pension savers current income. Finally, we expect retention rates to be almost life-long. Like robo-advisors, Grandhood offers algorithmic asset allocation based on low-cost ETFs, which means that Grandhood’s total annual fees are below 100 basis points compared to 200–400 basis points for almost all direct peers. Rather than paying fees for active asset management with the promise of outperformance, the sound investment advice is reaching better net investment returns by charging lower fees. In the current low interest rate environment, lower fees mean that your retirement savings will be as much as a third higher with Grandhood, compared with the average direct competitor. Low-cost is no doubt the safest way to secure your retirement savings.
In today’s market, consumers experience an abundance of investment and insurance products. Contributing to the lack of transparency is the pension market playbook of bundling savings with products like health, disability or life insurance. For many of the occupational pension plans, consumers are forced into a bundled product with significant minimum insurance contribution. Objectively how much insurance is required is a function of age, net wealth, health condition, family situation and several other factors. It’s hardly a ‘one size fits all’ situation which many of the bundled offers seem to suggest. I have no doubt that a simple and transparent retirement savings product will be a compelling proposition for most future pensioners trying to solve for one thing: An acceptable replacement rate. Consumers can buy insurance product on the side as needed. Grandhood will focus on the basics. A simple and transparent mobile-first pension savings product. Low-cost, no hidden fees and a simple simulation of what your current savings plan will lead to when you retire.
When we are young retirement seems far away. When we establish families and mortgages we tend to favor money today over money at retirement. The reality is that your ultimate replacement rate is a direct function of how early you started your retirement savings plan. This is caused by the most powerful ‘law of finance’ or what Albert Einstein once called ‘the most powerful force in the universe’ — compound interest. Good advice is saving early and consistently. This is even more true in the current low interest environment. Few people probably realize that a 2% average net return requires 3x in annual savings compared to a world with 5% average net returns. Grandhood has various interesting ideas on how to educate consumers on the importance of retirement savings. The most obvious one comes from Grandhood’s narrative and the name itself. When we retire we want to continue living our lives, fulfil our dreams and experience life in full. We do not want to ‘retire’ like previous generations — we’re more likely to maintain active and adventurous lifestyles, building on what comes after childhood and adulthood. This is what the founders call ‘Grandhood’. Rather than talking about retirement, the narrative is to engage consumers by talking to their dreams. Our only task, really, is to ensure they can afford to realize them.
I’m genuinely passionate about making pensions work more effectively for consumers and fully committed to helping Jon, Jens and Mathias on their journey. I can’t wait to see them solve the retirement savings problem and rattle the pension cage at the same time.