A high percentage of workplace pension scheme members use the default investment options for their pension. Therefore, finding the right mix within the default investments for members is very important for employers when setting up or reviewing a scheme.
Our latest insight takes a closer look at what default investment options are available from the different workplace pension providers.
Workplace pension schemes must offer a default investment fund for members who do not want to take investment choices. This fund must be chosen to meet the investment needs of most of the scheme’s members and is therefore important for employers and their advisers to get right when setting up or reviewing their workplace pension scheme.
The suitability of the default investment fund has become more important than ever since the introduction of auto-enrolment, with the Department for Work and Pensions (DWP) saying it is likely that the vast majority of individuals automatically enrolled into a scheme will end up in the default option. Therefore, the design of the default investment option plays an important role in securing good outcomes for members.
The default investment option should take into account the likely characteristic and needs of the employees who will be enrolled into it and take into account their risk profile. Therefore, when selecting a workplace pension provider, employers are likely to pay a lot of attention to the default investment options the provider offers and if these are likely to suit members both current and future.
The introduction of Pension Freedoms in 2015 also added additional layers of complication to picking a default fund as now when members reach age 55 they have the choice about how, when, and if they access their pension pot. This makes the path members are taking a little less predictable as whereas previously most members almost always had to buy an annuity, now they have the choice to draw down some, or all, of their pot in one go, at different times, in different ways, or to simply leave it.
Our data shows that all workplace pension providers are providing a default investment vehicle in line with Pension Freedoms with investment governance of existing schemes from their staging dates. The majority are doing this for both new and existing members.
It is worth noting that Legal & General are not applying the changes to existing default funds automatically. Unlike all other providers.
Other than Hargreaves Lansdown, where a distributor takes responsibility for investment governance (governance in accordance with DWP auto enrolment recommendations) clients of all workplace pension providers can use the providers fund platform to customise their investment offer. These same providers also allow the distributor to make ongoing changes to their investment offering. Standard Life however only will make these ongoing changes for existing members.
Our data shows that all providers other than Hargreaves Lansdown will allow the adviser to customise the default fund option. All allow changes to the name, asset allocation, fund selection, frequency of fund balancing, and life styling frequency. Other than Aegon Workplace ARC, Legal & General and Legal & General Master Trust all also allow changes to be made to life styling through model portfolios.
Use of adviser branding is supported by all the providers who allow the customisation of the default fund option other than Aegon Workplace ARC and Scottish Widows Master Trust. Customised factsheets are less well supported with Aegon Workplace ARC, Legal & General, Legal & General Master Trust, Scottish Widows and Scottish Widows Master Trust all not offering this option.
Also to help advisers, Aegon Workplace ARC, Aviva – Designer, Aviva – My Money, Mercer Master Trust (Scottish Widows), Scottish Widows, Scottish Widows (GSIPP), Scottish Widows (Master Trust), Standard Life, Standard Life (DC Master Trust), and True Potential offer a scheme risk profiling tool to help advisers select an appropriate investment.
The number of default fund options on offer from workplace pension providers which meet the DWP guidance on default fund criteria vary from as low as one to over ten.
Our data shows that all providers monitor the objectives, suitability in relation to their target market, and volatility of their default fund options. However, Hargreaves Lansdown, Mercer Master Trust Aviva, Mercer Master Trust Scottish Widows, Scottish Widows, Scottish Widows GSIPP and Scottish Widows Master Trust do not set a volatility target for their default funds.
Other than Fidelity and Fidelity Master Trust, all workplace pension providers can also take ongoing responsibility for the suitability of default funds for individual schemes, a big bonus for employers/scheme administrators who are looking to de-risk their culpability for default fund choices.
Part two of this insight will be published on Thursday were we look at what the core default investment funds of each pension provider, approaches towards risk ratings and what ESG funds are available in the default investment options
