Tuesday, 24 April 2018

    Decoding the default fund

    A panel of experts debate the default fund – and give an insight into their own schemes

    Calum Mackenzie, senior investment consultant, Aon Hewitt, highlighted the importance of the default fund to pensions schemes, saying that it is where the majority of members end up, not wanting to select investment options and preferring to be in a fund that is guided by advisers and trustees.

    To improve default funds, he argued that the default strategy should be about understanding what members want, engaging with them and communicating with them. From there, the key steps are to better understand risks, to use the best tools and diversification strategies, to have better matching at retirement, and to have better fund monitoring.

    Members can go into the plan with statutory AE contributions or the “enhanced” plan with increased contributions and ancillary benefits

    Trinity Mirror has an evolving lifestyling option, according to David Astley, group pensions manager. The fund has gone through several transitions from 2005 until this year, when the original plan closed to new members. Now members can choose to go into the plan with statutory AE contributions or the “enhanced” plan with increased contributions and ancillary benefits. With a wide range of members, the company’s priority is to ensure that the fund selection meets everyone’s needs.

    Tim Banks, managing director of Alliance Bernstein, advocated the use of target date funds (TDFs), which do not rely on members having to specify a retirement age but rather a period when they are thinking of retirement. The communications around target date funds are, he argued, relatively simple – making member understanding of the fund much easier.

    There is no real need for member engagement in TDFs

    Equally, there is no real need for member engagement as components of the funds can be reviewed and updated with no member disruption. The investment options are clear, and updated to take account of the changing financial environment.

    David Grant, chair of Aviva’s money purchase pension scheme, championed clear, well-communicated information about default funds, arguing that members must be educated so they can make well-informed choices. Aviva have reviewed, monitored and evolved their fund, always asking if it is fit for purpose and undertaking risk profiling.

    They are now running surveys, focus groups and layered communications for members, as well as online investment profilers, pension decision makers and pension trackers. Aviva also intends to make at-retirement options more efficient and more flexible.

    There is no average member

    Simon Chinnery, head of UK defined contribution, J.P. Morgan Asset Management, warned that in any default fund, it is vital to consider the needs of all members. Most DC defaults are orientated towards an average member – but, as Chinnery said, “there is no average member”.

    He stated the importance of maximising the number of people reaching retirement with a decent pot, saying that “defaults need to be designed for the masses rather than the few… with solutions provided for the majority.”

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