PensionDCisions research: most DC plans to review default option

More than half (54%) of defined contribution (DC) plans intend to review or change their default strategy in the near term. This figure is up from 20% in 2009.

The findings are part of the 2010 PensionDCisions UK Sponsor Default Survey, which polled 62 large UK plans, representing 630,000 DC members and £10.7 billion in assets.

The survey shows that across the three different entities driving asset allocation – fund managers, consultants and plan sponsors/ trustees – for more than three years prior to December 2009, the average annualised performance differential was 2.6% between the various decision-making groups.

Graham Mannion, managing director at PensionDCisions, said: “Asset allocation is a primary consideration for the DC industry and is a significant driver of the value delivered by default solutions.

“Since 2007, the survey has shown that measuring performance against product-specific benchmarks can be misleading as the widespread use of asset-class specific benchmarks implicitly locks in the asset allocation. Moving the focus towards ensuring that risk is rewarded is an essential requirement for a more transparent, efficient and dynamic marketplace for DC services.”

Additional findings include:

• Since 2007, the average default rate has remained constant, between 78 – 81%.

• Plans that do not believe that member reliance on default funds represents a commercial risk exhibit a significantly lower default rate (72% versus 86%) and a slightly higher level of diversification in asset allocation.

• Risk adjusted performance over three years before December 2009 is superior where fund managers are responsible for asset allocation decisions.

• During the growth phase, depending on the consultant influential in the design of the default solution, the average equity allocation can range from 94% to 68%.

• At retirement, depending on the consultant influential in the design of the default solution, the average cash allocation can range from 41% to 24%.

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