Pensions risk must be reduced by improved investment strategies

Employers must improve investment strategies for defined contribution (DC) pension schemes’ default funds to protect members’ retirement prospects.

According to the National Association of Pension Funds’ Annual Survey 2006, over 90% of DC scheme members choose the default invstment option because they do not feel they have sufficient knowledge to make active investment choices.

Research by the Pensions Institute at Cass Business School, Dealing with the reluctant investor: innovation and governance in DC pension investment, analysed the DC investment options currently available and found that most traditional default funds do not match members’ needs adequately in terms of asset allocation and risk profile.

It estimates that more than three million people are currently enrolled in a default option, and that following the auto-enrolment of 2012, a further eight million people could enter the DC investment environment.

The report also found that employers and pensions professionals shy away from advising reluctant investors because they are afraid of legal liability if the outcome is unsatisfactory. This is a particular danger for members of contract-based schemes where there is no board of trustees to protect members’ interests.

Debbie Harrison, a senior visiting fellow of the Pensions Institute and co-author of the report, said: "While it is true that the action of offering a default does not constitute individual advice under the very precise regulatory meaning set out by the Financial Services Authority, it is equally evident that reluctant investors in DC schemes assume that the default fund has been chosen to meet their specific needs. Employers and pensions professionals must be encouraged to take a clearer role in selecting the default fund investment strategy and the range of investment funds on offer in the scheme."