A report by PricewaterhouseCoopers warned that thousands of people could witness their pension pots shrinking by 20 percent.
Defined Contributions pensions pots, which are designed for target retirement ages, are no longer suitable for today’s generation, said Marc Hommel, pensions leader at PwC.
The research found that a typical lifestyle structure targeting a retirement age of 65 years will accrue a pension pot of £300,000. However, an alternate lifestyle structure with a target retirement age of 70 years will see the savings pot jump to £365,000.
Pointing out substantial difference of £65,000 in just five years, Hommel blamed the “’lifestyle investment structures” of schemes where money from a employee’s pension pot is initially invested in high-return but more risky assets and switched to cash and bonds five – ten years before the anticipated retirement.
The lifestyle structure is almost a default option for employer sponsored defined contribution pension schemes and four out of five employees end up choosing them.
“There’s a danger that, under existing lifestyle default structures, investments will be switched to low-growth assets too soon and people could lose the opportunities for valuable higher returns. Given that many of today’s workers are already likely to have inadequate retirement savings, any threat to pension pots is a big concern”, Hommel said.
He argued defined contributions schemes work fine for people with predictable retirement age but may not be satisfactory to people who wish to work longer.
The recent relaxation of rules around buying annuities means lifestyle structures are less suitable for people who, irrespective of their intended retirement age choose to stay invested rather than withdrawing funds to buy an annuity, said Hommel.
“Employers and trustees need to review the DC default investment structures in their workplace pension schemes, and consider whether modernising is necessary to take into account increasingly varied and unpredictable retirement needs of employees”, he warned.