A vast array of fund choices often results in members settling for default funds, so is there a happy medium?
There is a general consensus that there is no value in offering more than ten different fund choices. Organisations that ignore this tend to find members are simply driven into the default fund.
Clive Grimley, investment adviser at actuarial firm Barnett Waddingham, says: “I would pay a lot of attention to the default and I’d offer half-a-dozen alternatives investing in cash, equities and bonds, but don’t go overboard.”
At the most basic level, a default fund should be offered which progressively switches members out of equities and into less volatile assets as they approach retirement. It is also considered good practice to offer a couple of broad-based equity funds focusing on the UK and globally, and an indexed fund which will exactly track the market to cater for those in their twenties and thirties who have sufficient years to recover if the equities do not perform well. Two or three funds with a mix of bonds, equities and cash with varying risk profiles should also be offered so that there is sufficient choice for members in their forties and early fifties, depending on other saving provisions. A pure deposit-based fund may also appeal to those who are extremely cautious, while property funds can be attractive to those who feel comfortable holding some of their pot in bricks and mortar.
Other funds that might be offered are specialist ones, such as single country funds or alternative asset classes such as private equity. Some of these sectors will certainly outperform at some stage or other, but there are risks associated with such investments.
Dan Looney, investment liaison manager at Towry Law, points to the great predictions made for the Japanese market in 2005 by the City, which then went on to bomb that year.
Employers might also consider whether a better return is likely to be yielded by funds charging higher commission. While funds that perform well will easily make up for any additional commission charged, a single provider is unlikely to be able to supply outperforming funds across the board.
Remember, less can definitely be more when it comes to fund options, and if you do have employees that might appreciate greater choice, a self-invested personal pension can be a suitable offering.