Investing in retirement: The $15 trillion question | The Economist

WHAT to do with your money when you retire? It is a question that worries many workers in their late 50s and early 60s as they prepare to forsake the daily commute. And it is a question that fascinates the financial-services industry, which would love to get its hands on people’s retirement pots.

The question is all the more urgent because pensions as people used to know them are disappearing in the private sector. The traditional defined-benefit (DB) pension was paid by a company on the basis of an employee’s length of service and final salary. Companies are retreating from such promises because of the cost; investment returns have been poor and people are living longer. Instead, staff are being offered defined-contribution (DC) plans, in which both employers and employees put money into a pot.

In this section

• The $15 trillion question
• Neither liquid nor solid
• Sub-zero conditions
• Managing Mammon
• Time and punishment
• Competition, hammered

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• United Kingdom

A pot is not a pension. It can be turned into one by buying an annuity, an income that will last until death. But outside Britain, few exercise this option. And the British government is in the process of abolishing the requirement to turn a DC pot into an annuity. Folk will be free to use their money as they see fit when they retire.

The sums are huge. According to TowersWatson, an actuarial consultant, 58% of all American pension assets are in DC schemes. In Australia, the proportion is 84%. In 13 countries studied, DC assets comprise 47% of the total, or around $15 trillion.

Some people may celebrate retirement by blowing their money on a world cruise or a sports car and then rely on the state to care for them. But the vast majority will be more responsible and will try to convert their pots into an income. This will involve a bunch of difficult questions, the answers to most of which are not knowable in advance, and on which they will struggle to get independent advice (many intermediaries get paid more for selling higher-charging products). How long will people live? How much will they need to set aside to cover the cost of nursing care? What will be the rate of inflation? What is the outlook for investment returns?

The finance industry has a whole range of products for retirement, all of which involve a certain degree of trade-offs. For example, most retired people would like some certainty about their future income. But that certainty comes at a cost; financial-services companies can provide it only by investing in assets with

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