73% expect to change DC pension scheme investment

Nearly three-quarters (73%) of respondents expect to change their pension schemes’ investment options, in order to offer members a combination of cash and income-generating strategies, according to research by Aon Hewitt.


Its research, which polled more than 200 pension managers, trustees and finance directors, focused on the impact of the Budget’s pension changes aimed at adding greater flexibility to the design of defined contribution (DC) pension schemes.

One in 10 (10%) respondents said they expect to redesign their investment policy to deliver a cash payment at retirement, which the member could take away and invest or spend as they wish.

A further 17% said they expect to invest to generate an income in retirement, although probably not in the form of an annuity, with some form of income drawdown strategy or other way to provide a regular income being the favoured options.

Jan Burke (pictured), partner and head of DC consulting at Aon Hewitt, said: “Our post-Budget poll made it clear: DC schemes should be prepared to offer their members more choices if they are really going to embrace the flexibility heralded by the Budget.

“The current approach of many schemes – a single lifestyle investment strategy – will need to be reviewed. Lifestyle strategies typically end up close to retirement by investing in bonds to match the cost of buying an annuity.

“But from April 2015 onward, many members will not want to buy an annuity, but will want to ‘cash out’ their pensions savings, either to spend them or to take advantage of the other Budget changes, such as increased [individual savings account] allowances and special pensioner bonds, or even to invest in property.”

Sophia Singleton, DC consultant at Aon Hewitt, added: “Schemes will need to engage with their members well before they retire in order to encourage them to think about how they intend to use their pension proceeds, and to ensure they invest appropriately in the run up to retirement.

“Even if annuities have fallen out of favour, many members will still want to apply their pension pots to generate an income, rather than blowing it all on the mythical Lamborghini.

“We expect to see a significant amount of market, and scheme, innovation as employers look to support members converting their savings into a regular income during retirement.

“Equally, for part of their savings, we believe pension scheme members will appreciate the total flexibility the Budget changes will offer them, and it will be sensible for schemes to accommodate this.

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“Single solutions will no longer be appropriate, so trustees and plan sponsors will have to work harder to ensure they understand the different segments of their membership, and how they can help address their needs.

“We are facing a brave new DC world and schemes need to think hard about how they are going to respond to it.”