Asset managers need flexibility on DC options: Cerulli

In the U.K., asset managers are “designing default funds that accommodate all three of the options available to retiring defined contribution members,” according to The Cerulli Edge —Global Edition.

Cerulli says in the report that covering all bases is the right way to go for those managers. “This is the right approach for asset managers to be taking, given the uncertainty as to which of the options future DC retirees will go for,” André Schnurrenberger, Europe managing director of Cerulli Associates, is quoted saying.

Reforms termed “freedom and choice” enacted in 2015 in the U.K. allow DC members to opt for cash, annuity, or drawdown when they retire. Before those reforms, they had to buy an annuity, which meant that all default funds were designed to target annuitization.

And even though annuities, chosen by just 12 percent, are the least popular option, according to the Financial Conduct Authority, with most retirees opting for cash and 30 percent for drawdowns, it’s not guaranteed that retirees will continue to disdain annuities.

According to Justina Deveikyte, associate director of European institutional research at Cerulli, many retirees opting for something other than an annuity have alternate sources of income during retirement—such as defined benefit plans or other savings and investments.

Deveikyte is quoted saying, “Taking a cash lump sum will suit most of the current cohort of near-retirees, many of whom have saved relatively little into DC pension funds and often have additional savings to provide them with a steady income in retirement. However, it is not yet known what choices future generations will make, especially as they will be increasingly dependent on DC pension savings for their retirement income.”

Those future generations may be more drawn to other options. Deveikyte adds, “It is important that default funds avoid targeting a specific at-retirement option, but are instead designed to accommodate all options and thus provide a decent outcome regardless of a member’s at-retirement decision. Default funds should be designed to provide the best possible outcome to the highest number of members. The focus should be on committed savers in the ‘middle ground’ who are most dependent on their DC savings but have limited resources.”

Cerulli research indicates that while 81.8 percent of asset managers currently have multiasset allocations included in their default fund offering, 50 percent of respondents plan to increase the allocation to multiasset over the next one to two years.

In the U.S., there’s been a slowdown in the allocation of insurers’ assets to third-party asset managers, but that shouldn’t be a concern, according to Cerulli. In fact, the firm “expects an uptick in such outsourcing over the next few years, leading to $2.2 trillion, or around 30 percent of total U.S. insurance general account assets, being entrusted to nonaffiliated managers by 2022.”