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Undvik fallgropar i pension
Improving longevity, volatile investment markets and inflation uncertainty can present significant risks for individuals retiring from a defined contribution pension scheme. These risks can be mitigated by careful scheme design and product choice. Policymakers can raise awareness of the risks and help members achieve maximum benefits by removing infrastructure barriers to efficient design and product pricing.
A report on defined contributions pensions has been published by the Groupe Consultatif (see Avoiding pitfalls in Retirement). The report focuses on the risks associated with the decumulation phase of retirement (when contributions have ceased and benefits are being drawn).
Most people are not wealthy enough to self-insure the risk that they might outlive their assets, given the improvement in life expectancy that has already been seen and the likely continuation of such advances. Therefore it is important that defined contribution pension arrangements allow members the option of having longevity protection, as is already the case for most defined benefit schemes. The longevity risk can be avoided by using the accumulated pension savings to buy some form of annuity product. The report analyses how existing annuity products may be used to mitigate defined contribution member risks.
In addition, the report suggests the “ideal” annuity product. For most people it is desirable that such a
product has the following features:
• Protection against outliving pension capital
• Ability to capture higher investment returns during (part of) the decumulation phase
• Potential for increasing payments
• Stabilization of income payments
• Downside protection, for example a guaranteed minimum retirement income
• A “money back” feature such as, for example, a guaranteed 20 year payment period
• Co-ordination between the different phases such as the transition from accumulation to decumulation and at the end of a guaranteed payment period
There is a continuing search for new products that will deal better with the opportunities and risks in retirement.
Policymakers have a role to play in eliminating infrastructure barriers, where they exist, to provide
cost-effective and efficient design of retirement products.
Moreover policymakers also have a role to play in ensuring that awareness about the risks and products available to members is raised to a satisfactory level.
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