The report shows that the requirement to convert accumulated pension assets into an annuity at the time of retirement or shortly after is very costly for a pensioner.
The report shows that the requirement to convert accumulated pension assets in an annuity at the time of retirement or shortly after is very costly for a pensioner.
The report, prepared by Professor Raimond Maurer and Barbara Somova of Goethe University in Frankfurt, Germany, demonstrates that the best investment strategy in retirement is to hold a significant proportion of pension assets in equity early on in retirement and to switch progressively to bond holdings and annuities over time.
The report outlines a number of key policy messages, such as:
• The regulatory framework in Europe should find a reasonable balance between satisfying the concerns of policymakers and addressing the needs of retirees. Enforcing compulsory conversion of pension savings into annuities does not give individuals the level of flexibility needed to choose the best approach to suit their circumstances and risk tolerance.
• A more balanced regulatory framework for the payout phase of funded pension schemes would spark innovation in the European financial market and stimulate the creation of payout products tailored to meet individuals’ retirement needs. Competition between providers of payout products would also increase, thereby lowering the cost of products.
• If compulsion nonetheless remains favoured, then the upper age limit for compulsory annuitisation should be increased toward 85 in order to achieve a proper balance between the objectives of securing a sufficient level of retirement income and protecting retirees from longevity risk as they reach advanced ages.
© EFAMA - European Fund and Asset Management Association
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