Calls for improvement to post-retirement solutions will be thrust further onto the industry's radar by the increasing number of defined contribution (DC) scheme members approaching retirement age without sufficient savings, says Watson Wyatt.

A new paper by the financial consultant suggests that the DC post-retirement hedging and de-risking market is currently under-developed, and that opportunities still exist for greater product development.

"The current practice of formulaic switching from growth assets to protection assets as DC members approach retirement age is too simplistic and will prevent many members from participating in strategies that can enhance the purchasing power of their portfolios," explained Gary Smith, senior consultant at Watson Wyatt.

"Fiduciaries of DC schemes will also need to increasingly engage older members on this subject."

The paper, Management risk around retirement, also looks at a number of developments in the market and regulation that could improve pre and at retirement investment: introducing flexibility around retirement date; deferring the date of annuity purchases and adopting a drawdown strategy; and the expansion of annuity-type products.

"Delaying retirement dates is becoming increasingly popular, but members should be careful to use this time to increase contributions while de-risking given their ability to take investment risk will be diminishing," Smith said.

The income drawdown option is recommended for consideration by members, as it provides greater control over assets while still allowing them to benefit from later purchasing an annuity.

Smith added: "Adopting an income drawdown strategy is more likely to be beneficial if the size of the DC saving account is significant and the member is not especially dependent on this pool of assets. However, there are some disadvantages including annuity prices being relatively unattractive at higher ages, reduced level of security of future income and the costs associated with such a strategy can be significant."

The rapidly evolving annuity market is also addressed, and the paper points out the increased flexibility and confusion that it brings with it for DC members, as well as unnecessary costs. Watson Wyatt is therefore recommending that greater fiduciary engagement with pre and at retirement members be adopted by companies to help them to choose from the plethora of new products on the market.

The paper is available here.

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