The choice of financial products being offered currently in defined contributions schemes is inadequate, a leading US academic told a pensions audience in London.
“It is not possible to obtain a DC product that guarantees 60% of final salary, no such offering exists,” says Zvi Bodie, professor at the Boston University School of Management. Such a product could be offered, he claims.
In the US, he says, there is not an option whereby the DC investor could earn a risk free return over inflation. “But outside the DC offering such products are available, where real rates of interest are guaranteed.” People want products that can beat inflation.
He predicts: “The next generation of DC products will be substitutes for DB plans, which are dying out in the US and the UK.” The challenge for the mutual fund in the US is to produce such products inexpensively.