Pensions firms warned over defined contribution schemes
There are serious shortcomings in the investment strategies of many pension schemes that could leave pensioners running low on money in their retirement.
Pension companies haven’t kept up with the times and are using out-of-date systems to assess how to invest their member’s money, according to a new report from financial services firm Aon.
It warns that most firms use lifestyle strategies consisting of three phases – early career, mid-career and pre-retirement – but that these phases are often still built around the notion that when people retire they will use their pension pot to buy an annuity.
The pension freedoms introduced in 2015 mean that upon retirement people are no longer forced to buy an annuity – that guarantees them an income for life – instead they can choose to leave their pension investments and take an income from it, or do a combination of the two.
How to draw an income from your pension
Aon has said that many defined contribution (DC) schemes have not reconsidered the objectives of their members as a result of the arrival of pension freedoms and this could mean they don’t have enough money saved when they come to retire.
“There is a clear need for DC schemes to check their investment objectives and to refocus on members and all their unique and evolving needs as well as the risks they are exposed to,” says Chris Inman, head of DC investment advisory at Aon.
Does your pension pot have a UK bias?
The paper also warned that many DC investment strategies are biased in favour of familiar economies in the early phase of pension saving.
According to Aon, if more than 10% of your pension pot is invested in UK equities you could have a home bias that could mean your investments are hit significantly by local political and economic events such as Brexit.
Given that pension savers are already exposed to any turbulence in the UK economy through their job prospects and the value of their homes they should consider not adding to that exposure through their pension pot.
How to pick the best pension funds
Pension providers must get with the times
Aon are challenging DC pension providers to bring their investment strategies up-to-date and make them reflect the modern employees' retirement objectives.
A “deep understanding of what matters to members can be used to develop bespoke investment strategies that are tailored to their unique needs and objectives,” the report states.
“Improving the value of membership in a scheme doesn’t necessarily mean using the cheapest investment strategies.”
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Aon may be correct but they have an axe to grind. There are no right or wrong answers on investing strategy only best guesses based upon current known factors. Even the best fund managers fail most of the time to beat a related index. Unfortunately its up to the individual to keep an eye on things and most of us are ill equipped to do that. I don't have an easy solution here, other than saving for retirement being better than not saving for retirement.
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Thanks mikecunliffe but I have no objection to profits. BUT I object to profits where rewards paid for dividends and salary packages are excessive especially in relation to business performance. However, profits are another debate. Taxation on fund withdrawals for daily expenditure is accepted but there should be no taxation on withdrawals used for, say, an ISA type of saving for future pension usual withdrawals. I think that some people would be better off managing their own savings/investments than career advisors.
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Some observations: FTSE250 is at a high is because the £ has collapsed making our exports cheaper. While we're still in the EU (Brexit hasn't happened yet) we're still proteced from the Brexit slump looming on the horizon. The UK's 10 year higher growth than most of the EU shows just how good it is for the UK to be in the EU. But with Brexit ahead the tables have turned with the UK's enonomy struggling whilst the EU27 and practically everywhere else in the World all booming. Brexit was voted FOR only amongst those who were permitted to vote. Those not permitted included 16-17 year olds, Brits living overseas and EU nationals living in the UK, the last 2 groups normally being permitted to vote in UK General Elections. In other words, the Brexit vote was biased in OUT's favour as a sop to the Tory right wing. It was therefore illegitimate. The EU27 is one of the World's richest markets and it's on our doorstep. Why would Chinese and US consumers buy our cars and other manufactured goods? China makes everything we make but much cheaper, and the US has an "America First" policy. We're going to be flooded with cheap imports, the £ will collapse and no one here will ever be able to afford an overseas holiday again Transferring our trade from the EU to other markets further afield means reducing the quality standards and other protections for UK consumers and reduced tariffs on imported goods. This will put millions of UK jobs at risk and expose consumers to increased health risks. As for now having 40 years outside the EU before deciding whether it's better in or out... we have the 40 years before we joined the Common Market/EU which to compare. During those 40 years we had the tail-end of the Great Depression, a World War and the collapse of the UK as the World's leading economy. I prefer these last 40 years thank you very much!
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24 February 2018