Members of pension scheme that offer additional voluntary contributions (AVCs) may not be receiving enough guidance to ensure they understand the investment options available to them.
According to Hewitt Associates’ 2007 AVC survey, a third of the AVC schemes surveyed automatically allocate members to a default fund rather than requiring them to make a choice when they enter the scheme.
The most common default option is cash or deposit funds. These funds gave average annual returns of 3.9% for the five years to 2007, compared with 14.2% for global equity funds (both net of fees). A member investing an average of £50 per month in these funds , therefore, will have missed out on £1,000 since 2002.
The survey also found that the number of investment options offered to AVC scheme members has increased from 11 in 2006 to 13 in 2007.
Chris Cairns, defined contribution pension specialist at Hewitt Associates, said: “These results suggest that employers and trustees of AVC schemes are adopting a more passive approach to managing the scheme. Unfortunately, this requires members to make some complex investment choices with very little support.
“While using a default fund can be a useful tool in increasing membership take-up, it does not encourage members to make proactive informed decisions about how to invest their money. To encourage this, schemes need to invest more time and resources in quality, targeted communications.”