Defined contribution (DC) default funds are reviewing and overhauling their design and governance to deliver good retirement outcomes for members, according to a report by the National Association of Pension Funds (NAPF).
Its Default fund design and governance in DC pensions report focuses on eight employers, including Bank of America, Heineken and Trinity Mirror, which have created, reviewed and improved their DC pension’s default funds.
It highlights 15 default fund design trends, provides 15 practical tips on how to approach default fund design and identifies common design features in the case studies.
The default fund design trends include:
- A strong focus on driving value for money over lowest cost, with the average member charge being around 0.5%.
- Stripping out investment volatility from the default fund.
- White labelling of funds so that changes can easily be made in future.
Common design features in the case studies include:
- Longer periods for de-risking.
- More flexible pre-retirement phases.
- More tailored and engaging communications with members.
The employers that provided case studies were also keen to share their experiences with others embarking on the review process, offering 15 practical tips on how to approach default fund design, including:
- The process can take longer than expected, with the average period being two years.
- Investment consultants and suppliers should be challenged to deliver against employers’ and trustees’ expectations.
- The design should be flexible enough to allow additional new features and investments in future.
Mel Duffield (pictured), head of research and strategic policy at the NAPF, said: “It is encouraging to see NAPF members leading the way in building the new generation of DC default funds over the past few years.
“Auto-enrolment is bringing in different types of scheme members, many of whom will be saving in a pension for the first time and will want protection from volatility in their investments.
“We are pleased to see so many employers and trustees rising to this challenge and managing to get a good, comprehensive deal for members on charges while keeping their investment risk down.
“It was also interesting to see evidence of the benefits of scale, with larger funds using their buying power to achieve better deals with consultants and fund managers.”