Decumulation behaviour is rapidly changing due to longer life expectancy and DC savers’ growing interest in flexibility, experts discussed at a panel debate.
The panel at the PensionsEurope Conference in Brussels included State Street Global Advisors (SSGA) senior investment strategist Maiyuresh Rajah, Sanofi global head of pension advisory Lukasz Budzynski and Amundi global head of retirement solutions Christian Lemaire, and was moderated by PensionsEurope vice chair and Irish Association of Pension Funds (IAPF) CEO Jerry Moriarty.
Rajah said decumulation behaviour has changed for a number of years, with the UK seeing an increase in choice after the 2015 pensions reform, and the Netherlands now being able to hold risk-bearing assets where they before were limited to fixed annuities.
“The popularity of traditional annuities is starting to change, it’s starting to wane. And that’s because most consumers seem to see a lack of value in annuities, and they don’t want to hand over the whole pension pot for a fixed income stream. Flexibility is becoming the key driver when retirees are choosing how to access their retirement savings instead of a guaranteed safe income in retirement.”
Rajah noted that investment strategies also need to change to cater to the need for flexibility. He presented a hybrid retirement income solution, which would include a 20-year decumulation strategy where the pensioner would be able to spend up to 75 per cent of the accumulated assets, followed by a guaranteed lifelong income.
SSGA’s Rajah also said people end up making sub-optimal decisions when presented with options and said a good framework is needed.
“The challenge is, yes, choice is a good thing for members, but there needs to be a framework around the choice to help them make the right decisions. Advice is a good idea, but again, in the UK, there is a history of people not wanting to go to the advisors. That’s now changing but something you need to take into account.”
Budzynski said the pension funds and employers play an important role when it comes to providing advice to members.
“We have seen this from a finance perspective as something we can give back to our membership in a difficult situation when there is a transition from DB to DC. We would like to be able to show them that we are giving them the most efficient DC arrangements possible.”
Another option is building investment strategies that help members, Rajah noted. “The FCA is now looking at retirement pathways so that the members have one in four options that they need to go into or were placed into by the provider, depending on what they want to do in retirement.”
However, a default is very important for the vast majority of members, the panel agreed. Lemaire said many members are not engaged with making choices.
“With low income rates, fixed annuities is a no-go for members, and also, what we do, is use lifecycle strategies. If you manage them over more than 20 years, the privity of capital preservation is on 99.9 per cent, you have a very low level of risk, and sometimes you can also expect higher returns than the ones you can get from a pure-guarantee fund.”
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