Getting to grips with pensions and investments can be challenging for employees. With global stock markets and many economies in a state of flux, it is hardly surprising that so many pension scheme members select their plan’s default funds because they either do not want to make a decision about where to invest their money or feel they do not have enough knowledge to be able to do so.
For pension and HR professionals tasked with overseeing a scheme, it is therefore vital to understand the default investment option and ensure it is the most appropriate for their organisation’s workforce.
Respondents seems to have got to grips with this: 87% say that, as an employer, they have broadly got a handle on the investment strategies of their default investment option, while two-thirds have a governance or review process to oversee these investment strategies.
When it comes to allocating responsibility for the default investment option, respondents use a variety of options. Just over half (51%) place responsibility with a governance or management committee, making this the most popular choice. Just under a quarter (23%) say some responsibility lies with their HR department, while passing responsibility to their financial or pensions provider or adviser is also a popular option for a number of organisations.
To ensure default investment options remain appropriate for members and are fi t for purpose, it is important to review these regularly. Just 13% of respondents say they do not review the strategies and aims of their default investment options. Of those that do, just under half (43%) do so at least annually, while 26% do so every two to three years.
Giving pension scheme members an element of choice around investment appears to be important to respondents. Providing investment choice enables more financially savvy staff to play a bigger role in devising and managing their own investment strategy. However, some employees may find too much choice overwhelming or even a little confusing.
Just under half of respondents (47%) say they off er all types of investment fund to scheme members, while 26% off er a governed fund range including about 50 funds. Just 6% off er only the default fund.
This is the only the second year we have asked specifically about default investment options rather than the investment options offered more widely under defined contribution (DC) plans. Although the figures cannot be compared directly, it is interesting to track the investment options offered over the years.
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Managed funds have remained popular. Back in 2000, for example, these were the most commonly offered investments available under DC plans and group personal pensions (GPPs), offered by 47% and 44%, respectively. Also popular that year were with-profits investments, which were offered by 45% and 43% of respondents with DC schemes and GPPs.
Lifestyling arrangements, which make up the top two options for the investment strategies of respondents’ current default options this year, have grown in popularity over the years. Back in 2000, lifestyle plans were offered by 37% of respondents with DC plans and 23% with GPPs. By 2007, this had risen to 69% of those that offered a DC scheme, while 72% offered access to these in 2008. This year, 62% of respondents off er an active (managed) fund with lifestyling, while a further 32% off er a passive (index tracking) fund with lifestyling.
Lifestyling arrangements take a more aggressive approach to investment, either wholly or mainly in equities, when a pension scheme member is younger and a long way from retirement. As members approach retirement, they are gradually automatically switched out of equities to more conservative investment types, such as fi xed interest or cash.
This switch will take place over a fixed period of time, for example five or 10 years, from an investor’s selected retirement date. Employers should therefore ensure their pension scheme members are aware of factors such as current market conditions because the switch will occur even if market conditions are unfavourable at the pre-specified time.
The percentage of employees opting for their scheme’s default fund has typically remained high. Back in 2007, for example, one-fifth of respondents said 76-90% of staff fell into the default fund, while a further 18% said that 91-99% of staff did so. These were also the highest percentages the following year, when 31% and 26% of respondents, respectively, said the same.
In 2007, 8% said less than 10% of employees took the default option, and just 3% said the same in 2008.
The majority of employers now provide some form of financial education around investment options for staff . Overall, 13% say they do not provide any, and 11% do not currently do so but are considering introducing some form of investment-related education for staff .
How employers educate employees about the different investment options has changed little over the past five years, with online and printed materials consistently remaining the top two methods of doing so. These media provide employees with a source of information they can refer to whenever they feel the need.
Should they wish to do so, employees can also use these methods of communication to access information outside of the workplace, for example should they wish to discuss their investment approach with their spouse or other
family members.
Online investment modellers have risen up the list of communication methods to take third place this year. These enable staff to play around with different investment scenarios to identify the most appropriate for their situation and retirement needs at little cost to the employer. Seminars and education sessions for groups of staff also remain a popular, cost-effective way of educating employees.
Read more from Employee Benefits Pensions and Workplace Savings Research 2012
