Decumulation Pathways are proposed to help achieve better retirement outcomes for those with Defined Contribution (DC) pensions. The DC fund is split into two parts, in proportions of the consumer’s choice. Most is allocated to the Pension Fund to provide a lifetime income, while the rest is placed in the Flexible Fund for flexible access and/or to leave as a legacy. The Flexible Fund is invested in flexi-access drawdown. The Pension Fund is invested in a guaranteed annuity, Collective Defined Contribution, or a Pooled Pension Fund which maintains individual DC funds but pools longevity risk between participants. An illustrative standard Decumulation Pathway is intended as a default solution, or can be tailored by the consumer. It uses the Pooled Pension Fund, an automated withdrawal strategy which ensures a lifetime income is provided and one that aims to increase in line with inflation, and a moderate risk investment strategy. The standard approach is evaluated using various metrics, indicating that it has as a strong chance of providing a higher income than could be obtained from an annuity or drawdown, with limited downside risk.

Rules of thumb (RoTs) are proposed as a means of promoting higher levels of Defined Contribution (DC) pension saving and to help stimulate debate about the high and uncertain cost of pension provision, leading to the development of solutions. The Lifetime Pension Contribution (LPC) tells young people what pension contribution is required over a full working life to achieve a decent retirement income, calculated as 23% of average UK earnings. Another RoT is that each 1% of earnings provides a pension of 1.5% of earnings. Other RoTs show how costs vary by retirement age and if the saverʼs retirement planning is on track. The current high cost of pensions is partly due to low interest rates and the inefficiencies of the DC market, with inadequate bulk purchasing power and risk sharing. RoTs might help encourage higher employer contributions, either through automatic enrolment or on a voluntary basis.

Dynamic financial analysis (DFA) is a technique which uses Monte Carlo simulation to investigate the evolution over time of financial models of funds, complex liabilities and entire firms. Although of increasing popularity, the drawback of DFA is the dearth of systematic methods for optimising model parameters for strategic financial planning. This paper introduces strategic DFA which employs the only recently mature technology of dynamic stochastic optimisation to fill this gap. The new approach is described in terms of an illustrative case study of a joint university/industry project to create a decision support system for strategic asset liability management involving global asset classes and defined contribution pension plans. Although the application of the system described in the paper is to fund design and risk management, the approach and techniques described here are much more broadly applicable to strategic financial planning problems; for example, to insurance and reinsurance firms, to risk capital allocation in financial institutions and trading firms and to corporate investment and business development involving real options. As well as describing the mathematical and statistical models used in the case study, the paper treats econometric estimation, asset return and liability scenario generation, model specification and optimisation, system evaluation and historical backtesting. Throughout the system visualisation plays an important role.