DC funds will have to invest through retirement

Pensioner-with-caneDefined contribution (DC) pension funds in the UK are reconsidering their investment options since the government ended the need for retirees to buy an annuity at retirement, Mercer, a pensions adviser, says.

According to Mercer, the scrapping of the annuity requirement may change the way trust-based and contract DC pension schemes view investment options and default funds offered to members.

Many DC members will be invested in strategies targeting the purchase of an annuity at retirement. Mercer says with requirements to purchase an annuity ending from April 6, 2015, existing “life-styling” strategies may now be inappropriate to members’ needs.

Brian Henderson, head of Mercer’s DC & savings team, says many people will still probably buy an annuity to provide certainty of income without the need to maintain an investment portfolio in retirement. But DC schemes will nevertheless by challenged to consider solutions that meet a wider range of consumers’ needs.

“We are already seeing DC governing boards question the suitability of their investment arrangements in light of the Budget announcement,” he says.

Henderson adds that some members will wish to remain invested after their official retirement age and make periodic withdrawals from their pension capital, while others may prefer to withdraw all of their funds as cash.

“Future retirees are likely to have a pattern of expenditure that is ‘U’ shaped. In the earlier years of retirement, expenditure remains high through travel and recreation, then diminishes with age, but will be later replaced by less discretionary items such as medical expenses and long-term care,” says Henderson.

Experience in other countries such as Australia, he adds, suggests that this pattern will trigger demand for pension schemes that can provide both investment growth and capital stability during retirement.

“In other words, the most successful DC schemes will be those that not only take people to retirement but have facilities to help members through retirement.”

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