Live Long & Prosper - Global Lessons in Developing Post-Retirement Solutions
We have been looking into what people do with their DC savings after retirement in various places around the world. No market has yet fully solved the puzzle of the most appropriate post-retirement strategy. The long-term nature and degrees of uncertainty involved often lead to conflicting objectives, seemingly impossible to achieve simultaneously. Many DC members have not contributed enough and they are living longer so have a problem of needing to make their assets in post-retirement work harder.
Politics play a significant, and often unhelpful, role. Due to election cycles and partisanship, politicians often have far shorter time horizons than retirement savers; the most popular, vote-winning policies are not always the most suitable in the long term. This merry-go-round of post-retirement systems around the world, demonstrating ‘progress’ by politicians, does not help retirees in the long term.
We observe that there have been insufficient contributions made into DC plans in the majority of countries we have researched. Our key conclusions are that, in addition to sufficiency of pre-retirement savings, a successful post-retirement strategy requires:
- Stable, real investment returns, net of costs
- Reliable protection against longevity risk
- Flexibility to adapt to changing requirements
- Simplicity in implementation and communication of outcomes.
In our view, a successful solution will inevitably be a blend of investment and insurance components in a balanced manner. With lengthening life expectancies, we anticipate strategies will blend a growth and income account-based approach for the first 15-20 years after retirement with longevity protection engaging in later life. However, an over-arching solution is far broader than simply a fund or insurance product.
We found that the majority of systems currently in place do not achieve satisfactory results on these key requirements. We suggest that solutions could be ‘approved’ as meeting a set of specific ‘needs’ criteria, therefore enabling better guidance for individuals at this difficult decision point.
Where a fiduciary is involved, for example in a corporate plan, an individual could be given a short-list of suitable investment funds and a short-list of suitable longevity protection options from which to choose. The individual would also choose the proportion to allocate to the investment component and the remainder to the protection component. A minimum proportion could be imposed on each. If permitted and tax-efficient, a partial cash lump sum might also be taken at point of retirement. For retirees where no fiduciary is involved at retirement, providing guidance about the need to have both components and having approved choices should help retirees with this difficult decision and improve outcomes for them. Asset managers and insurers should take some responsibility for the thoughtful design of these strategies.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.