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Schroders' Alan Brown: how to manage decumulation

Schroders' Alan Brown: how to manage decumulation

Alan Brown
Chairman of the Trustee Board’s Investment Committee, Schroders Pension Scheme, UK

I think the biggest issue the pension industry has to face is in the defined contribution (DC) space. The asset accumulation phase is fairly well dealt with as diversified growth funds are going to be the most sensible way to go for most during the asset accumulation phase.

It is the asset decumulation phase and the changeover between those two that needs to be managed, and that is where I think the industry needs to develop better propositions.

The two risks we ought to cover are variability of investment returns and longevity.

One of the things the industry needs to do is to attempt to deal with these risks. Annuities are intended for this purpose: you can stop worrying about when you die and somebody else has to worry about what the investment returns will be. The trouble is that annuities are hideously expensive, so under most circumstances you would do better to go with some kind of income drawdown solution.

Therefore, it would be really helpful if the industry could develop a deferred annuity market. If you were able to buy an annuity that is going to kick in when you are around 90 years old and cover you for your longevity risk, that would be really good. The trouble is, there is no market for that today. I think the government would be well advised to try to generate one because if not, people would end up falling back on the state.

And the one entity in the country that cannot walk away from longevity risk is the government.

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