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Defined Contribution

Lifecycle strategies better for participants – study

Participants would benefit from higher returns and lower risk if lifecycle strategies were included in the pan-European personal pension product, said a study by the SDA Bocconi School of Management and commissioned by the European Fund and Asset Management Association.

The European Commission proposed in June that pension providers be allowed to distribute retirement savings products cross-border in the form of the PEPP.

The study, "Consumer Protection and the Design of the Default Option of a pan-European Personal Pension Product," found that lifecycle strategies, which use varied asset class mixes and adjust the risk over the course of accumulation period, were better for plan participant outcomes than bond-based products with guarantees.

Bocconi researchers studied historical return data in the period between 1969 and 2012, finding a majority of savers using lifecycle strategies could get a return greater than 5.9% over a 40-year accumulation period during the study years. This compares with a 3.3% return achieved through life insurance products with a guarantee.

Separately, the study examined the returns of actual lifecycle strategies between 1992 and 2012, finding participants invested in them could expect a return greater than 5.1%, compared to 1.2% through a guarantee-based product.

"The level of capital protection offered by lifecycle strategies is very robust. The Bocconi study confirms that lifecycle investment strategies are a powerful tool for delivering high real rates of return and managing risks, not just investment risk but also inflation risk. We strongly believe that these strategies should qualify as a default option for the PEPP," William Nott, EFAMA president, said in a news release on the study's results.

Peter De Proft, EFAMA director general, added in the release: "We hope policymakers look both at the net return offered by lifecycle strategies, and at the return loss caused by a financial guarantee over a long investment period. The potential of the PEPP in reducing the pension gap lies in its ability to generate return and retirement wealth; life strategies are able to strike the right balance between return generation and capital protection."