Defined contribution (DC) pensions schemes will need to reconsider the investment options offered and the default funds used following the Budget 2014 changes, Mercer has said.

Many DC members will be invested in strategies targeting a purchase of an annuity at retirement, however existing 'life-styling' strategies may now be inappropriate to members' needs as the requirement to buy an annuity end from 6 April 2015.

Mercer head of DC and savings Brian Henderson said: "We believe that many people will still buy annuities to provide certainty of income without the need to maintain an investment portfolio in retirement.

"However, giving consumers more choice on retirement will challenge those who govern DC schemes to consider solutions that meet a wider range of consumers' needs."

DC governing boards are already reassessing the suitability of their investment arrangements in light of the Budget, Henderson said.

He added that schemes need to take into consideration the fact that not all of the members who invest in a scheme's default funds will need an annuity when they retire, as some may prefer to t withdraw all of their funds as cash or others may wish to remain invested after their official retirement age and make periodic withdrawals.

Henderson said that future retirees are likely to have a pattern of expenditure that is 'U' shaped in that expenditure is high during the early years of retirement, and then it diminishes with age, which is then followed by high expenditure again due to medical expenses and long-term care.

He said: "Experience in other countries, such as Australia; suggest that this pattern will trigger demand for pension schemes that can provide both investment growth and capital stability during retirement.

"In other words, the most successful DC schemes will be those that not only take people to retirement but have facilities to help members through retirement."

First published 16.04.2014

monique_simpson@wilmington.co.uk