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18 Apr 2023
by Suzi Lowther

Is your default DC pension fund meeting employee needs?

With most DC pension members invested in the default fund, it’s important that it meets their needs

6 questions to ask about your default DC pension fund.jpg 1

 

Default funds are the investment ‘vehicle’ a member’s contributions (both their own and their employer’s) will be paid into automatically if the member hasn’t made their own choice of fund.

Studies show that more than 90% of defined contribution (DC) pension members are invested in the default fund. It means the benefits your employees receive from your DC scheme will depend heavily on the suitability and performance of that default fund.

Here are six key questions to ask;

1. What are my responsibilities?

The roles and responsibilities around default funds can vary, so be clear who is responsible for what in each of the following areas:

  • the suitability of the default
  • its design
  • its governance
  • reviewing the default.

The parties who typically have responsibilities are your provider, advisers, the employer and scheme trustees (if you have them) but it will vary from scheme to scheme and between funds.

2. How does the default take into account the retirement profile of members?

Department for Work and Pensions guidance on offering default options clearly states the default option design, suitability assessment and reviews “should take account of the likely characteristics and needs of the employees”.

Be clear what this means in practice for your scheme. For example, is it general population/pension scheme data that’s considered or is your specific scheme and/or employer experience taken into account?

What is your experience telling you? Are members generally retiring at an earlier or later age than was anticipated over the period since the default was designed or last reviewed? If so, is this experience being reflected?

3. What is the high level objective?

Any default should have a high-level objective, explaining what it aims to do and the strategy that will be used to achieve this aim. It should explain how the investment strategy will manage risk and what it aims to achieve for member outcomes.

This needs to fit with the profile of your employees/members and their retirement needs – an employer’s structure and the demographics of your membership may change over time. What was right several years ago may no longer be right now.

4. How is suitability assessed and risk managed?

Suitability drills down into the default, looking at investment strategy and asset allocation. It’s a crucial area that needs to reflect employees’ needs – including expected age at or time to retirement and the level and shape of retirement income they’re likely to need – and risk profile. When assessing a default’s suitability, factors to consider include:

  • Member capacity to take investment risk: Are they likely to have other pension savings? What are the trends in personal finances, eg changing debt levels or home ownership, or employment market changes, eg move to part-time working ahead of retirement, salary increases etc?
  • Retirement expectations and financial needs: Could members start retiring earlier or later? What income levels will they need in retirement and how likely are your employees to attain those levels?
  • Member risk appetite: How comfortable are employees/members with their pension pot going up and down in value? What about inflation and the cost of living – should this affect the default? Is this changing – are members happier to take risk to reflect a desire to make ‘green’ or responsible investments?

5. What is the cost and what effect will charges have on members?

Demonstrating value for members is critical. Default options should be appropriately and competitively priced and charges should not be excessive. Charges and fees need to be clearly explained and the effect they have on member outcomes made clear.

It’s important to understand this in the context of your employee profile. Charges can have a really big impact on the retirement pot members will achieve, but remain balanced in your assessment and consider other services being provided such as online tools, effective communications, access to individual guidance and support are particularly valuable.

6. How is the default option communicated?

Understanding your members, their needs (including accessibility), their knowledge, their concerns, their engagement in pensions is important.

There are lots of things you have to say about your default but are the way, when and where you’re saying them reflecting your employee’s needs? Is there more you could or should be saying, or different methods of communication you could use? Remember to ask employees for feedback – they’re the best judge of what is or isn’t working.

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