Brian Henderson, head of Mercer’s UK DC and savings team explains: “Many consumers will turn away from annuities upon retirement. Together with the blurring of work and retirement, this means that investment strategies aimed only at the purchase of an annuity on a set retirement date are largely defunct.
“Instead, schemes will need to provide investment approaches that match members’ needs at different stages of their working lives. They need to be robust enough to provide a good income in retirement, but also flexible enough to allow the members the option of how they can be ‘cashed in’ when retirement does take place.”
Fellow consultant Hymans Robertson, has tweaked its Guided Outcomes strategy, originally launched in 2013, to take into account the new options available to retirees.
“Broadly speaking there are three glidepaths, depending on whether members want to take their pension pot as cash, buy an annuity or pursue income drawdown,” says Hymans head of DC, Lee Hollingworth.
“For younger members, a default glidepath towards drawdown provides the best balance of options, while those near retirement with small pots are better suited to a cash glidepath. What matters is tailoring this path based on each member’s key characteristics.”
Providing the flexibility to choose from three different preferences is a vast improvement on a system that previously marched savers towards annuitisation regardless of timing. Some, however, have yet to be convinced.
“This approach makes sense in terms of structure, but it remains to be seen how actively members will engage with that choice,” says SSgA’s Byrne.
JPMAM’s Chinnery is also unsure just how proactive DC members will be in deciding how they access their savings in retirement. “Most people will be no different,” he says. “They don’t want to know about pensions and I suspect that will continue up to retirement. Then I suspect many people will realise they haven’t got enough and will push back retirement.”
The post-Budget DC world will see more members staying invested through retirement, but for others annuities or cash will be appropriate.
As Byrne says: “We expect to see hybrid models that combine investment strategies with secure income. This could be about annuitisation of the part of the member’s assets either at retirement, or by building in the secure income element later in retirement when the longevity risk becomes more significant. These solutions will take longer to develop, but will appear in the next few years.”
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