A study commissioned by the European Fund and Asset Management Association (EFAMA) recommends the adoption of a life-cycle investment strategy as a default option for the pan-European personal pension product (PEPP).
The study – carried out by the SDA Bocconi School of Management in Milan, Italy – concluded that the use of life-cycle strategies as the default investment option for the PEPP would be “economically desirable” for consumers.
The study addressed potential strengths and weaknesses of alternative protection schemes, which can be adopted as a default option in a private, third pillar, pension product. In light of the observed behavior of savers adopting the default option at international level, the study performed a comparative analysis aimed at quantifying the costs and the benefits of two different risk mitigation techniques and market-standard investment products available to European consumers.
EFAMA reported that based on study results consumers would benefit from superior returns and comparatively low risk compared with bonds over a long-term investment horizon.
“Our study, which belongs to [the emerging household finance] area of research, aims at contributing to the current debate on the type of default option that should offered by a pan-European personal pension product,” said Claudio Tebaldi, professor at the SDA Bocconi School of Management and one of the authors of the study.
Bocconi researchers studied historical return data in the period between 1969 and 2012, finding a majority of savers using lifecycle strategies could get a return greater than 5.9% over a 40-year accumulation period during the study years. This compares with a 3.3% return achieved through life insurance products with a guarantee.
Separately, the study examined the returns of actual lifecycle strategies between 1992 and 2012, finding participants invested in them could expect a return greater than 5.1%, compared to 1.2% through a guarantee-based product.
“The level of capital protection offered by lifecycle strategies is very robust. The Bocconi study confirms that lifecycle investment strategies are a powerful tool for delivering high real rates of return and managing risks, not just investment risk but also inflation risk. We strongly believe that these strategies should qualify as a default option for the PEPP,” William Nott, EFAMA president, said in a news release on the study’s results.
The Bocconi study can be found here.