Talking head: Nest's CIO Mark Fawcett puts together a 10-point framework for DC trustees, arguing for a focus on growth, flexibility and cost, while managing inflation and longevity.
As most members were likely to take cash lump sums and buy annuities, the focus was on the accumulation phase and trying to smooth the transition into annuities and cash.
But the new freedoms have created both fresh opportunities and risks around the decisions trustees are going to have to make on behalf of savers.
The analysis on member needs and expectations we present as part of Nest’s ongoing consultation, ‘The future of retirement’, isolates five objectives and five risks that trustees will need to address in the new framework.
The objectives
Growth: This may not be the main priority, but for anyone who stays invested rather than buying an annuity, there is likely to be some expectation that their money will continue to grow.
Flexibility: Retirement is increasingly more of a process than a single event, so solutions need to be flexible and reasonably liquid.
Clarity: Easily communicated solutions are more likely to build confidence and trust in the new framework.
Cost: There will be a need to demonstrate both actual value for money as well as addressing perceptions of value for money. The perception of value in particular being something both annuities and drawdown have struggled to secure historically.
Managing risk: This is probably most important, which is why we have identified the five key risks below – and there are certainly more.
The risks
Conversion risk: Asset allocation at maturity should ideally align with the underlying asset allocation of the member’s method of withdrawing their retirement savings. Mismatches could lead to extra costs and uncertainty.
Inflation risk: How pots and incomes are protected against inflation erosion will clearly be a key consideration.
Longevity risk: When most DC members had to buy an annuity, longevity risk was largely taken on by insurance providers. Not so in the new regime.
Investment risk: Evidence suggests solutions in the new regime will need to recognise both the financial and emotional impact if people’s pots fall in value, especially as they will have less time to contribute more to make up for any losses at the end of their working lives.
Market timing risk: The performance of markets at the point at which someone starts to draw down their savings (or purchase an annuity) can have a significant impact on outcomes.
We suggest most considerations will be a variation of one of the broad areas outlined above.
Nevertheless, we’re posing the consultation question: ‘Are there other risks and objectives to be taken into account for DC savers approaching and in retirement?’
We are looking to test our evidence on this and a breadth of related areas to help encourage the design of solutions that truly meet savers’ needs.
To read more about 'The future of retirement', or to send us a submission, please visit www.nestpensions.org.uk.
Mark Fawcett is chief investment officer at Nest
