The 2018 DC Future Book, a 84 page-long report on UK defined contribution (DC) pensions published by the Pensions Policy Institute (PPI) with Columbia Threadneedle, showed the next generation of retirees will live longer, retire with more debt, face higher living costs and become more dependent on their DC savings.
Some will also need to provide ongoing support to both older and younger family members. At the same time, they expect to travel more than their parents’ generation, the analysis concluded.
These challenges increased the complexity of the decisions people need to make at the point of retirement and raised the question of how to make the most of their savings after they have stopped working, which was why the asset manager called for a "rethink of investment solutions for the decumulation phase".
Columbia Threadneedle called for an auto-enrolled default drawdown investment solution, underpinned by a well-diversified and dynamically managed multi-asset solution.
This can deliver robust risk-adjusted returns while at the same time protecting savings against market turbulence, investment sequencing risk and inflation, the asset manager said.
Michelle Scrimgeour, chief executive for Emea at Columbia Threadneedle, said: "Around 9m people in the UK will turn 55 in the next decade. For many, choosing an investment strategy and a sustainable income withdrawal rate will provide overwhelming, let alone taking a view on life expectancy and on how to protect their nest egg.
"Yet the pace of policy change, uncertainty about how the market will develop and the fact that most DC pension pots are still relatively small, are all creating barriers to innovation in the retirement space post freedom and choice."
Ms Scrimgeour argued that the UK "can’t afford to wait".
She added: "Auto-enrolment for working people has been heralded as a success so far. We believe the same principles should apply to those at the point of retirement.
"For most people, a well thought-out and relatively inexpensive default drawdown fund with a preset investment strategy, flexible withdrawal rate and an opt-out option, increases the likelihood of achieving a level of income that not only sees them comfortably through retirement, but also meets their changing spending and therefore income needs."
MPs had called for the introduction of a single default drawdown but the government rejected this idea.
But the Financial Conduct Authority (FCA) is expected to publish a consultation paper on ready-made drawdown investment products in January 2019, to prevent consumers from investing their pension pots into cash.
Daniela Silcock, head of policy research at the PPI, said the increased freedom in accessing DC savings may help people meet varying consumption needs during retirement but they may struggle to know how to meet these increasingly complex needs.
She said: "Some might benefit from using currently available secure products, such as annuities, advice and support. Others may benefit from pre-designed retirement pathways and other forms of help."
Malcolm McLean, senior consultant at Barnett Waddingham said there was a need "to do more to guide people on the best use of their pension savings," but he wasn't convinced the introduction of default decumulation pathways was the right way to go.
He said: "Placing people automatically in particular products without their express consent at this stage of their lives is in my view inconsistent with the freedom and choice agenda.
"It is also incredibly difficult to devise something that is going to be suitable for the majority of retirees, when unlike auto-enrolment at the start of a savings plan, everyone’s needs are different with different levels of savings behind them and different needs going forward."
maria.espadinha@ft.com
