UK – 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,” said Zvi Bodie, professor at the Boston University School of Management. Such a product could be offered, he claimed.
In the US, he said, 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 by a certain rate.
He predicted: “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 industry in the US is to produce such products inexpensively.
A firm that Bodie is involved with, Integrated Finance Ltd, is trying to roll out an “escalating annuity” designed for 401k plans. He described this as a deferred annuity with a guaranteed minimum level.
The plan participant can then save an extra amount, which is invested in equity options, he explained. Bodie hoped this would be rolled out in the course of the next year. “We are working with brokers to achieve this.”
The mutual fund industry needed to make clear to DC participants what the choices are. “In DC, the process is not so much on of education but of communication with the end user. It is a question of understanding what kind of risk they are willing to take with their retirement money.”
Bodie was giving a Watson Wyatt public lecture on ‘Life-cycle theory and defined contribution pensions’, organised with the UBS Pensions Research Programme at the London School of Economics.
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