National Employment Savings Trust, London, published a blueprint for a retirement income strategy that will meet participants’ needs, following the introduction of new pension freedoms by the U.K. government.
The £475 million ($738 million) national defined contribution plan published the blueprint following a consultation on the future of retirement, which looked for evidence from around the world on the needs of DC participants. Changes in the U.K., which mean participants will no longer be required to buy an annuity to provide income in retirement, mean new strategies will be necessary for participants as they grow older.
The blueprint sets out three building blocks to cover three phases of life after retirement: an income drawdown fund, a cash lump-sum fund and a later-life-protected income fund.
For people in their mid-60s to mid-70s, “the main aim of a retirement income strategy at this stage should be to maximize sustainable income in real terms,” said the blueprint. About 90% of the savings initially would be invested in the income strategy, paying income into the participant’s bank account every month. The remaining 10% would be allocated to cash. Participants should not have to lock up all of their money, but NEST said a “small amount of the total pot should be gradually set aside in order to secure an income for rest of life.” NEST suggested 1.5% to 2% of savings annually.
People in their mid-70s to mid-80s should focus on providing steady income, keeping pace with inflation. The majority of savings should be liquid, and money set aside for later-life income should be locked in and committed to a mortality pool with the purchase of a deferred annuity.
The final stage, mid-80s and older, would be focused on protecting the participant from all or most investment and longevity risk, with the participant receiving their income through an annuity.
A spokeswoman for NEST added the cash pot would be available all through the process, and any excess investment growth would be swept into this fund, to be used as and when the participant needs.
“We believe this is possible but it requires innovation,” said Mark Fawcett, chief investment officer at NEST, in a news release accompanying the blueprint. “We’ve developed an evidence-based blueprint for how to meet members’ needs. We hope this will stimulate the innovation necessary for us and others to deliver what members will need and want.”
