GLOBAL - Pensions experts at life assurer Standard Life are investigating ideas which could give defined contribution pension members improved flexibility and security in their retirement benefits.
Speaking at the Irish Association of Pensions Funds last week, one Standard Life Ireland official questioned whether members might be given more risk protection in the collection of their post-retirement income if they were given a time frame within which they could choose to retire rather than specifying they will retire on a particular date.
During a Q&A session on pension fund flexibility, the Standard Life Ireland official asked if the risk of money purchase investment volatility could be reduced by allowing individuals to choose from a selection of dates within a pre-agreed time period, which might then offer days showing better investment returns.
"Could there be some consideration to the idea of allowing a range of dates between which [pensioners] could select in relation to the market and the valuations they prefer, particularly during market volatility?" said the spokesman.
"It would benefit both themselves and employers by improving risk. I have never seen that idea suggested but it appears to me a fixed date is always considered when it may not be best for the employee when they could consider a range of dates beyond the age of 65," he added.
Jerry Moriarty, head of policy at the IAPF, responded to the proposal by agreeing any new ideas to improve the risks to employees' pensions should be discussed.
"There needs to be a consideration of more flexibility because of the market risk and anything that can reduce risk in an alignment with an individual taking on all that risk is a good idea," he said.
This initial proposal was raised in Ireland because government and pensions officials had noted in discussions employees are still somewhat wary of DC schemes because they carry all of the retirement income risk.
But since then, Standard Life has revealed to IPE while it is looking into whether a retirement ‘date range' is feasible, in terms of management and the financial implications, officials say they are also investigating the possibility of providing some form of defined contribution pre-retirement guarantee or ‘lock-in'.
John Lawson, head of pensions at Standard Life, said he believes there should be greater flexibility both pre-and post-retirement in the income and returns protection DC members have.
"At the moment, we have a situation where people are choosing a [retirement] funding date 30 years in advance but this could change. People could move out of this, rather than being forced to make a choice [of exactly when they retire] as they approach retirement," said Lawson.
"We could perhaps lock some of that fund away and guarantee it won't decrease by adding derivative-based tools which would give them a guaranteed level and some of the upside potential up to the years ahead of their retirement date. It works better than lifestyling because it means you stay in equities. My beef is you are putting people in gilts and cash in their 50s, but they are likely to live another 30 years so investment risk does not match their needs."
More specifically, Lawson said the life insurer is questioning whether it might be possible to add, for an additional annual management charge, an overlay guarantee on the fund which means should the investment market be hit by turbulence some of the returns and assets are already tied in.
He proposes, for example, DC guarantees could be developed by locking in gains on set dates, ahead of retirement, which, over the life of the plan, allow the employee of a employer-sponsored defined contribution scheme to receive a guaranteed return of between 110% and 170% on their assets.
This should introduce sufficient flexibility to encourage potential returns through higher risk assets but lock in gains so contributions are not lost.
"It is quite an exciting option for the future. It could be offered to a group on an institutional basis to create funds for a whole scheme with some sort of protection. We would know roughly which [retirment] dates are likely to be most popular and we could offer in advance a range of dates. We could provide the downside protection on that particular date through a range of different protections too," he added.
The cost of any guarantee would be dependent on the level of protection provided, but Lawson suggests if an investor guaranteed 100% with 170% upside, it could perhaps come at a cost of 120 basis points on top of a passive investment strategy paying 30bp.
Standard Life has been investigating similar strategies for post-retirement income, however, the UK government has just unveiled Pre-Budget Report comments stating it did not believe so-called ‘third way annuity products' would be appropriate for consumers as they only potentially benefit a small number of consumers with large pension funds.