Savers relying on a defined contribution pension are sleepwalking into a pensions black hole, claims a leading asset manager.
30 SEPTEMBER 2016 | ANDREW PRING
Columbia Threadneedle Investments says that research it commissioned from the Pensions Policy Institute (PPI) shows that the majority of those paying into the most common form of workplace pension - a defined contribution (DC) scheme - are automatically opting for the default fund, a generic fund chosen by their employer, which may not generate the return required to meet their retirement needs.
Dominik Kremer, Head of Institutional Sales, EMEA at Columbia Threadneedle Investments said: "Many employees are adopting the ostrich position and remain detached from the saving part of the retirement planning process. This means that they are not able to maximise the potential of their investment and risk sleepwalking into a pension income black hole."
Employers and employees must both increase joint contribution levels, said Kremer, who added: "It is also crucial that the savings are invested in an appropriate fund that meets the needs of a modern retiree. Typically the funds that employees' are automatically invested in carry a higher risk, which may not be suitable for those approaching retirement.
"We believe pension funds should have a dynamic asset allocation framework, where portfolio managers choose investment assets from the ground up and target real returns (instead of a market benchmark) with lower levels of volatility."
Figures from the PPI show that, in order to have a two-in-three chance of generating an adequate income in retirement, employees and employers need to contribute between 11% and 14% of band earnings into a workplace DC scheme - over 400% more than the current employee contribution level - and start saving at the age of 22.