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DC pensions funds prove worth

Well designed default funds can help against the problems that politicians are seeking to address by reviewing rules on compulsory annuitisation.

According to Watson Wyatt’s 2008 Pension Plan Design Survey, more than 90 per cent of workplace DC schemes have a default fund. The survey found that more than 90 per cent of these default funds involve lifestyling, meaning that it switches members’ investment towards less risky asset classes as they approach retirement.

Watson Wyatt senior consultant Paul Marco says: “Good pension scheme design has made the problem that the politicians are seeking to address much smaller by ensuring that many people are not vulnerable to huge stock market swings when retirement is just around the corner”.

The Conservative Party has proposed a temporary relaxation of the rules to give people more scope to defer purchasing annuities, arguing that people should not be forced to lock in losses by trading out of shares after markets have fallen sharply. The Government has said it is keeping these rules under review in the context of the current crisis.

Commenting Marco says: “It looks like yet another part of the rule book might be torn up in response to the current crisis. Some people would welcome the opportunity to avoid locking in their losses but you can never assume that the only way is up for the stock market. People who need the market to recover quickly could be playing a game of double or quits”.

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