Evidence points to the majority of savers wanting someone to take responsibility for their investment decisions, so figures of 70-85% of scheme members opting for the default strategy are the norm. The millions of new savers entering DC for the first time as a result of auto-enrolment is likely to lead to this percentage increasing.
This places a strong duty of care on employer sponsors or trustees to select an appropriate default and to show, as the Department for Work and Pensions (DWP) calls for, ”an alignment of interests between those running the scheme and the members”.
Fortunately, there is plenty of guidance from the DWP and The Pensions Regulator on applying good governance to the default.
Our members’ aim is to promote investment excellence in DC in the UK. We believe that DC savers deserve the best possible investment service, and we are concerned to promote the widest range of investment techniques and approaches.
Whether a default plan is bespoke or off-the-shelf, we encourage employers and trustees to put themselves in the shoes of their members and create what is most appropriate for their workforce.
Guidance will encourage regular reviews, but this is not just about investment performance, but about having a clear scheme objective. This will help frame the view on the appropriate trade-off between risk, return and volatility within asset allocation, both in the growth and de-risking phases.
We support the National Association of Pension Funds’ recent work, Default fund design and governance in DC pensions, which focused on discussions with its members that have recently reviewed and overhauled their default fund design.
Key features are: the balance between cost and value, the importance of active governance and good, simple communication, and growing diversification and innovation in de-risking.
We were heartened to see so much thought and vision applied to such a critical part of the DC scheme.
Simon Chinnery is chairman of the Defined Contribution Investment Forum