How updating your default fund can cut costs and boost engagement
Action for Children focused on developing the right investment strategy in the wake of the pension reforms
How do you solve a problem like the freedom and choice reforms? Making sure your investment strategy is fit for purpose is a huge part of the answer, and a challenge that Nick Wood, the pensions manager for the charity Action for Children took on with gusto.
One of the biggest challenges that Wood and his team faced was designing a strategy in the face of inertia. “People tend to see pensions in the heading and put it into the ‘to read later’ pile. It was tricky to come up with some sort of default arrangement when we didn’t know what members wanted,” he says.
People tend to see pensions in the heading and put it into the ‘to read later’ pile
First, the team set a replacement income target of 40% of salary. Next, they looked at how to achieve it through investment. Moving away from the traditional lifestyle approach they had used in the past, they settled on a three-phase structure, using three multi-asset funds.
The first phase lasts up until 20 years before retirement, and the sole objective is to achieve growth. During the second phase, when members gradually move from being 20 years away from retirement to 10, volatility is gradually reduced. Pre-retirement is the third phase, where the objective is to achieve stable returns with low risk. Wood expects the final phase to evolve the most, as the scheme witnesses member behaviour in the light of freedom and choice.
While the investment review was under way, the team also took the opportunity to introduce an updated range of self-select funds, including a new sharia equity fund.
“Prior to the change, we had eight self-select funds. There was a lot of discussion around increasing that number. The 11 self-select funds that we have are probably the maximum we would include; any more would get confusing,” says Wood.
Another debate centred on investment philosophy. “We tended to move away from actively managed funds to passive. There was a debate as to whether the additional charges outweigh the additional possibility of returns,” recalls Wood.
A final challenge was achieving greater transparency around cost. “One of the things we struggled with is understanding transaction charges. Trying to write our chair’s annual statement was a real struggle. Putting the detail in there was very difficult – providers are reluctant to provide that because I think it’s difficult for them to do that based on the systems they have,” explains Wood.
Their considered approach has paid off: there has been increased engagement with the scheme, says Wood. “The changes were introduced in December 2015. We communicated in advance and got a fair amount of response, which was surprising. It encouraged people to think about their investments.
“We got a lot of questions about how people work out if they’ve the right approach to risk. Our DC provider has some good online tools our members can use. A number of people increased their contributions, which was really encouraging.”
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