Taking a longer view into retirement at, say, age 60, enables you to think in terms of longer-term investments, which enables more illiquid investments to be considered in the investment mix. Why not, as many of these investments may be in search of growth over a 20 to 30-year time horizon?
The obsession with getting ready to cash it all in is only really relevant for those determined to stay in the Option 4 camp.
Decumulation CDCs offer route to access a wider mix of investments
Next, there is the option of decumulation collective defined contribution (CDC) schemes, which naturally de-risk savings because they are pooled investments. Multi-employer CDCs should be offered during the next year.
Trott says of CDCs: "By extending our secure and dependable CDC framework, more members will be able to benefit from the opportunities of sharing risk.
"This means their pension savings work harder for them and provide, on average, a better outcome for their retirement than might otherwise be available.
"It is an opportunity to help shape the next stage in one of the most significant developments in UK pensions and I encourage all interested parties to respond and play their part in helping improve outcomes for tomorrow’s pensioners."
CDCs will invest to and through retirement, giving the fund manager a longer time horizon. This, combined with the collective nature of the schemes, will enable CDCs to hold more private equity, more infrastructure and more illiquids than ordinary DC schemes.
As CDC schemes get underway, I expect they will make the Mansion House target of 5 per cent appear rather low.
A key pillar of CDCs is that the pension income seeks to keep pace with the cost of living, something which this year anyone on a level annuity will have found very painful.
It was last year’s seminal research by the Institute for Fiscal Studies that finally de-bunked the myth that a level pension will be OK as pensioners slow down and spend less through retirement. They simply do not.
Pensioner’s annual expenditure goes up at CPI plus 1 per cent until around age 80 and increases more modestly thereafter at around CPI minus 1 per cent.
So, the investment managers of a CDC scheme will seek investments that offer the best prospects of inflation-plus returns, and if they see those happen to be in private equity, funding small growing companies, infrastructure and others, then they have the mandate and ability to seize the opportunity.
In summary, there are many routes that the pensions market can go down to help diversify DC pension savings and to secure improved investment returns.
