Pensions schemes have adopted a measured response to freedom and choice when designing default funds

The majority of the schemes (60%) say that over 90% of their members are invested in the default fund, showing that the strategy used for the default remains at the heart of defined contribution pensions design. Fewer than 10% say that less than 70% of their membership were in the default fund.


Most schemes are broadly happy with their default strategy. Nearly eight out of ten (79%) believe their fund’s performance is excellent or good, although that means there are still 21% of schemes that only find performance satisfactory (18%), or believe it to be unsatisfactory or poor (3%).

The majority of the schemes (60%) say that over 90% of their members are invested in the default fund”

When it comes to measuring success, for the most part, this is assessed against benchmarks at total fund level (62% take this approach), and or at underlying fund level (41%). Just over a quarter (26%) of schemes measure it versus peers at total fund level.

The impact of freedom and choice

The seismic changes of freedom and choice have been met with an evolutionary rather than revolutionary approach to default fund design. 70% of schemes believe that their default is fit for purpose post-reform.

Almost two thirds (62%) of schemes are still using lifestyle funds, and for the most part have made adjustments rather than creating a new structure from scratch. Since the announcement of the pensions reforms in 2014, the most common change has been the addition of a diversified growth fund (DGF), with 35% of schemes saying they had made this change. This increased to 44% among trust-based schemes.

Interest in target date funds (TDF) remains muted, with just 10% of DC schemes having adopted a TDF since 2014.

Unsurprisingly, less than half of (44%) have introduced multiple glide paths. In some cases that may be down to characteristics of the membership, or an active decision to invest on members’ behalf with a specific goal in mind unless the member chooses otherwise. At present, 44% of schemes default funds are either targeting cash (19%) or an annuity (25%), compared to 23% that target drawdown. Only a third of schemes target a mix of all three.

At present, 44% of schemes default funds are either targeting cash or an annuity”

The long-term impact of the freedom and choice reforms on scheme member behaviour is still unknown, but it is interesting that trust-based schemes are more likely to be targeting an annuity (38% of trust-based schemes, compared to 25% overall), and are also less likely to offer drawdown in-plan (5% of trust-based schemes, compared to 25% overall). 

The default fund charges cap, introduced at the same time as the retirement options reforms, has proved far less disruptive for schemes. Over three quarters (77%) said that it has not affected their default strategy, and a further 12% said that although it had affected them, it had not been detrimental. Only 5% said it had had a negative effect.

ESG factors

Respondents had more mixed views on the importance of environmental, social and governance (ESG) factors in default fund design. Only 4% of respondents overall said that these were very relevant; a further 58% said they were relevant and 39% reported that this was not relevant for them.

Trust-based schemes were more likely to be convinced of the significance of ESG factors, with 68% saying that they believed this was relevant or very relevant to them.

Regardless of the type of scheme, there is very little appetite to canvas member opinions on ESG. 70% had not asked members for their views and did not intend to do so. Limited interest in ESG factors was also evident when we asked respondents what factors they would use to rate the performance of their default fund. ‘ESG factors’ was the lowest-ranked answer, regardless of scheme type.


When asked about measures for rating the performance of the default fund, there are some interesting comparisons between trust and contract-based schemes. The three most common measures were value for money (88% of all schemes), cost (75% of schemes) and whether the fund fits the membership profile (71%).

However, contract-based schemes were more likely to be concerned with whether the scheme fits the profile of their membership (87% of contract-based schemes, compared to 67% of trust-based schemes). Trust-based plans were the most likely to use value for money as a top factors in assessing performance.

This article comes from the DC Landscape report, to read the full report click here.