Paul Sweeting, European Head of Strategy for J.P. Morgan Asset Management :
“A raft of new pension legislation has been announced in the Queen’s speech. This offers a range of new options and opportunities for individuals and employees. However, none of the new options is without risks, and a significant amount of planning is required to ensure that the legislation does not cause more problems than it solves.
Annuities
“The Queen's speech confirms changes announced in the budget – at retirement, members of defined contribution plans can take as much of their fund as they like as cash. More choice at retirement is good for retirees, but it doesn’t solve the main issue – individuals are not saving enough in the run up to retirement, despite the roll-out of auto-enrolment.
“In addition, the move away from annuities raises questions around investment advice and default options at retirement – whose responsibility is it to ensure that individuals are making appropriate decisions about their pension pot, the individual or the employer? Finally, there is no guarantee that investors will be able to do better than they would with an annuity – better returns will require members to take more risk.”
Collective Defined Contribution (CDC)
“As expected, the Queen's speech also set out plans to introduce collective defined contribution (CDC) schemes. CDC helps answer some of the issues around pensions – it offers the stability of fixed contributions with but with the ability to share risk over generations. However, it is reliant on there being a constant supply of new members to share the risk.
“The economies of scale do offer cost savings, but the success of CDC relative to traditional defined contribution (DC) rely on taking more investment risk and being able to obtain higher returns. If these returns are not achieved – or even if they are, and members live longer than expected – then benefits can be cut.
“There is also a risk that a future government or regulator might view the pensions targeted in CDC as being defined benefit (DB) in nature, placing additional burdens on sponsoring employers. It is important that any CDC legislation explicitly avoids this, or that CDC schemes are set up at a far enough remove from employers to make any such recourse impossible.”
|
