Around 28 per cent of pension income will be from defined contribution schemes by 2060, up from 5 per cent in 2016/17, according to the Pensions Policy Institute (PPI).
Its latest briefing note, DC scheme default strategy policy considerations, revealed that in 2016/17, the average pension income was made up of the state pension (56 per cent), defined benefit (39 per cent) and DC (5 per cent). However, it has projected that by 2060, this will change to state pension (59 per cent), DB (13 per cent) and DC (28 per cent).
It noted that the average amount people will receive from their DC pension in the future will be less than the average amount people receive from their DB scheme today. As a result, it has stressed the importance of DC default funds in the future outcomes of DC members.
DC default funds have also been impacted by the introduction of freedom and choice, introduced in April 2015, which means that people no longer need to by an annuity.
The PPI noted that as most people used to take a 25 per cent tax free cash lump sum and put the rest in an annuity, most default funds deployed a lifestyle approach, which protects members’ savings in the years before they purchase an annuity, when there may not be time to make up significant losses.
However, since freedom and choice, annuity sales have declined, whereas drawdown product sales have increased. Therefore, the PPI has said that lifestyling may no longer be the most appropriate default strategy for the average member. However, the policy note acknowledged that there is no widely recognised appropriate default strategy for DC members.
As a result, the PPI has proposed several options such as investment in illiquids, alternative assets and diversified funds, which could potential alternatives to lifestyling as they require less de-risking. Another approach to meeting the varying needs of DC members is by offering different strategies based on people’s intended withdrawal methods.
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