What is a default fund? This is the investment vehicles that are selected automatically for a member by their employer when joining a pension scheme unless the member specifies an alternative. In Jan 2023, the pension regulator (TPR) raised it concerns “Supporting defined contribution savers in the current economic climate”. The focus was on the importance of good governance and investment arrangements.
- Review your governance structure.
- Review the characteristics of your scheme’s saver profiles.
- Gather and analyse changes in saver behaviour.
- Review your scheme’s investment arrangements and implementation.
- Monitor fund performance and member impact.
- Review the risk of cash investments and other investments that may not protect DC savings from high inflation.
The Pension regulator also published a checklist to develop your own action plan
More specific consideration for supporting your employees.
- Strengthen your member support capability and target your efforts towards those most affected and in need of help.
- Use insights to inform your guidance and saver engagement plans.
- Review communications to ensure savers can make informed decisions about their investments.
- Review and inform savers about the support, guidance and modelling tools which may help them navigate current market conditions.
- Help savers understand what recent performance means for their individual circumstances.
- Encourage savers to inform the scheme if their retirement plans change.
- Highlight the importance of seeking advice and taking a long-term perspective on pension saving.
- Highlight the risk of potential scams.
- Consider your savers’ communication journey, including additional information to supplement annual benefit statements.
- Be specific in your guidance, to the circumstances faced by savers at different points in their retirement plans.
- Tell them how certain actions can protect or boost their savings.
- Guide them through the trade-offs that they will need to make, and the risks involved.
- Monitor member action / inaction and adjust and evolve your engagements plans accordingly.
The most common type of default fund option are lifestyle funds.
Lifestyle funds are designed for savers who don’t make active fund choices over the course of their working life. They are ‘pre-programmed’ to deliver set outcomes on a specific date.
There are two stages within this process.
Growth Stage – When savers are still some ways from retirement, in this stage these funds invest in a mix of investments designed to grow your pension pot. You can choose the fund that best meets your savings needs and attitude to risk.
Retirement Stage – on approaching retirement your fund will begin moving from high-risk investment to low risk fund. Your priorities are likely to change as retirement approaches, and its important to get some advice in this area. As different lifestyle funds offer a different glidepath.
A glidepath is the process of automatically reducing your exposure to the market. Some providers start that process as early as year 6, year 10 or from year 15.
How have default funds performed?
