GLOBAL - Some form of insurance or ‘lock-in protection' might be a solution to the risk of investing in defined contributions pensions, but the industry must in the short-term do much more to inform members about the risks they face, say consultants.

Ros Altmann, former pensions adviser to the UK government, published a report today, sponsored by MetLife, arguing the credit crisis has "hugely damaged" the UK pension system and left many investors disillusioned by destroying the "old idea" that equity investments will always provide generous pensions.

More specifically, she said "millions are facing an impoverished old age because, she claimed, the UK pensions system has been "bet" on shares so argued new thinking is needed,such as a form of insurance on defined contribution pensions, much like someone protects a home against flooding and burglary, where the "potential solutions could include insured pensions or unit-linked guarantees which provide guarantees in return for a premium".

"The old idea that stock markets can always be relied on to deliver strong returns has left millions facing an impoverished old age. It is therefore important that people understand risks and costs have now passed from employers onto their own shoulders," said Altmann.

It is a stance in part shared by Gary Smith, senior consultant at Watson Wyatt, as he noted the credit crisis and its impact on pensions as investors and those in the pensions market have awoken to the full risks individuals face.

"The current crisis has certainly brought to light the risks asked of defined contribution pension provision," said Smith.

"The risks were always there, and are inherent in the system, but had largely been glossed over or misunderstood until now. This has provided a wake-up call for some schemes and highlighted the risks that have always been there," he continued.

That said, Smith recognises there are already strategies in place, such as lifecycling, which do limit the impact of equity losses towards retirement.

"Lifecycle investments design has been reasonably common in DC for a number of years, where members are de-risked by moving into bonds prior to retirement, and that has proved to be extremely effective and done what it has always meant to do, which is balance the risk profile of the individual. It has had its fair share of criticism as it doesn't look very exciting and some people felt it was not as good as investing in equities.

"But it is a balance between risk and return and some of the real solutions people have to think the individual's need to be more aware of risk-return decisions. We have got to work harder to get the message across to individual members of the schemes, and what the trade-off might be for individuals," he added.

Similarly, Smith said he was aware of talk in the market of new products entering the market to provide some form of insurance.

"There are certainly conversations in the market place about protected-type [pensions] growth, and insurance is one way of providing that protection. But it is difficult to provide in a cost-effective way. In practice, can [the industry] deliver the protection that the providers are comfortable with, and at a cost they are prepared to charge for it. And I'm not convinced you can provide that degree of insurance protection," continued Smith.

One such range of pension protection products may have just hit the market as HSBC today launched five unit-linked Protected Retirement funds aimed at trustees of occupational pension schemes using a trustee investment plan, which promise to maximize equities exposure while locking in gains through CPPI - ‘Constant Proportion Portfolio Insurance'.

The funds cost 1% annual management charge and are said to give investors 100% of contributions plus 100% of any investment gain while exposed to global stock markets, if held to maturity.

The funds have varying closed-ended maturity dates, phased in five-year periods from 2020 to 2040.

Such structured products have been available in the retail investment market for some time but have until now been seen as having a barrier to entry within the institutional pensions arena because of what was considered to be a high cost to the investor, according to HSBC.

All of this latest discussion about the risk of investing DC assets in equities during the accumulative years comes just a day after lane, Clark & Peacock argued a new default DC strategy should be adopted incorporating diversified growth funds, to reduce equity risk. (See earlier IPE story: Diversified growth to play key role in DC default)

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email