Momentum Conference 2011: Review of Workshop A1: Defined Contribution

There are over 50 types of annuity for DC members to choose from on retirement.  As a former adviser to trustees of DC pension schemes I knew there was a range of products available to DC members on retirement, but I had not appreciated just how many combinations there are.  I also expected that different providers focused on certain types of product and targeted different parts of the market, however I had not appreciated just how different rates could be for a single product across providers, or the scale of the impact of enhanced rates on impaired health.

Members often pick the annuity which provides the highest initial rate of income.  This might in part be explained by the fact that members tend to under-estimate their future life expectancy which would impact on their perception of whether a level or increasing annuity will provide the best overall value.  Furthermore, many members may not appreciate how significantly inflation will erode a level pension over two or more decades.  This opens the way for possible claims of a misselling scandal in the future – where members claim to have suffered as a result of poor or incomplete advice.

The situation in likely to be further complicated by annuity reforms and increased flexibility for DC arrangements (where unlimited funds can be withdrawn in certain circumstances).  Furthermore, DC membership can only grow as a result of automatic enrolment.  As a result there is more scope than ever for actuaries to add value in the DC arena to help employers, trustees and members to achieve the best possible outcomes from DC retirement provision.

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