More than a year on from the implementation of freedom and choice, Jenna Gadhavi looks at how scheme design is evolving, and how many ordinary savers are being expected to take responsibility for their financial choices

It is a little known fact that it is possible and perfectly legal to buy a house without using a conveyancing solicitor. But who could say they know someone who has done just that? Because of the specialist legal knowledge required to carry out the transaction, the vast majority would rather play it safe and ask an expert.

So why is it that following the implementa­tion of the freedom and choice reforms, defined contribution scheme members have been expected to choose the funds they would like to invest in, simply because they can?

In reality, the average employee does not have the financial knowledge or confidence to make such an important decision without expert help.


That could explain why so many members are still opting for the default fund. This year’s DC landscape survey results show that the average percentage of membership invested in their scheme’s default fund was 82%. And rather than regarding it as the new system failing, it could be argued that this is the best place for them.

Stephen Budge, principal at Mercer, agrees. He said: “Scheme engagement should not nec­essarily lead to members making an active investment decision to alternative choices, as the majority of members are likely to be better off by remaining in the default.

“Issues such as a lack of member under­standing and a ‘set-and-forget’ mentality mean that member choice creates additional risks, whereas the investments used in a default are continually reviewed by the trus­tee, governance committee or the provider.”

Those sticking with annuities do not necessarily believe that it will be the most popular choice

If members did choose to self-select, the set-and-forget mentality is certainly some­thing that needs to be addressed to avoid costly situations where members are left with­out sufficient funds in retirement.

Some schemes in the US actually require members to formally review their active investment choices, otherwise they will be moved back to the default, and one can under­stand the rationale for this.



Prior to the freedoms, life was much simpler. All UK DC schemes had glide paths that tar­geted annuities.

But now that savers are no longer forced to buy an annuity, a pension fund is no longer necessarily designed to provide a steady retirement income, and can offer cash lump sums and drawdown options, too.

So how has this affected scheme design? We asked schemes what the final asset alloca­tion of their default funds target, and 34% said an annuity, 15% cash and 14% draw­down; 37% said a mix of all three.

The experience of Laura Myers, a partner at consultancy Lane, Clark & Peacock, echoes this. She said: “Overall, we have seen a prefer­ence for three lifestyle strategies rather than one middle of the road approach.

“Many of these clients haven’t just added a drawdown and cash lifestyle to their range, they’ve also moved away from annuity-focused strategies as the default position for their members, instead choosing either a drawdown or cash-focused strategy.”

But introducing multiple glide paths alone won’t guarantee success. If schemes use this three-strategy approach, they must remember that its success will be determined by their communications, and their ability to engage with members sufficiently to enable them to choose what is best for their own circumstances.

Budge’s experiences have been slightly dif­ferent so far. He said: “Out of our clients who have undertaken a review, the majority of those schemes have remained with an annuity outcome, with the remaining ones equally split between cash and drawdown. However, the number opting for a drawdown outcome as the default is increasing and we believe this will continue to do so.

“Importantly, those sticking with annuities do not necessarily believe that it will be the most popular choice; rather, they believe it provides the least risk to member income in retirement: i.e, if the member elects to take cash or to drawdown on their savings in retire­ment, that’s their own decision.”

He did add, though, that the use of alterna­tive lifecycle strategies to support different benefit outcomes is a very useful approach to helping engage members as they reach retire­ment, to help focus their thinking.

However, the positive election of invest­ments linked to different retirement outcomes will take time to be adopted by members, as these flexible retirement choices are still rela­tively new.

So it seems that for now members are stick­ing to what they know with defaults and annuities.

After all, just as you wouldn’t buy a house without the services of a solicitor – even though you could – there are some things the average lay person believes are better off in the hands of experts.

To download the full report, click here.