DC risks need better explanation
Regulators in the US and UK should be focusing their efforts on providing ‘efficient explanations’ of the risks associated with individual investment options under defined contribution (DC) pension plans, as both countries increasingly lean on private savings incentives to overcome future demographic burdens on state pension provision, according to a report by David Harris, a senior consultant on insurance and financial services at Watson Wyatt.
The report ‘ Common Horizons: comparing savings and retirement in the USA and UK’ was commissioned by The Smith Institute and financial services group Prudential.
One of the report’s main points highlights the trend that in tandem with the advent of flexibility in retirement and savings products consumers are taking a more active role in signalling their propensity to risk - alongside a growing focus on consumer rights generally.
Harris questions whether this will throw up dangers; particularly in the light of increasing product sales through e-commerce, asking: “Are consumers able to utilise effectively the plethora of investment choices provided to them through e-commerce?”
He adds:” Some doubts exist over whether simply providing enormous investment choice simply incurs high levels of administrative cost that are increasingly passed onto the consumer. On the whole our instinctive preference for more choice is positive.
“ Yet greater investment choice may produce negative results through a sustained ‘bear’ market.”
Harris goes on to argue the need for cohesive and consistent consumer protection regulation to match product innovation and consumer investment behaviour.
As consumers in both markets are becoming more demanding and less loyal to product providers –vigorous competition has been the net result, he says, prompting the need for action.
However, Harris points out that increased regulation may not be the answer, arguing that this could be a negative to both the consumer and product provider.
“ In effect, corresponding regulators have had to balance their concerns for investors and retirement plan participants with the need to nurture innovative and practical solutions towards encouraging retirement and investment contribution levels.”
Such a response, he says, could also be appropriate to countries such as France and Germany once more extensive pension and investment reforms are adopted.