Employers must offer their workforce a default fund option as part of their auto-enrolment duties, but it may be some time before their strategies are in any fit state to meet their employees’ needs.
Firstly, employers face major constraints in the pension provider market. Default funds have been evolving over the last 20 years and have yet to come into their own as a distinctive, standalone investment choice, rather than an amalgamation of legacy funds and concepts.
Secondly, the defined contribution (DC) market operates on a daily pricing model, which means providers must be able to price DC fund assets daily. This model lends itself more readily to liquid assets, such as equities, and away from illiquid assets that may offer more competitive returns on investments, such as property.
But employers face a huge challenge to engage employees with considerations such how long they expect to live and work, the lifestyle they seek in retirement and the contributions they need to make during their working lives to achieve this outcome, let alone engaging them in the asset allocation of their fund.
Defaults are the funds into which the contributions of employees unwilling to make an active investment fund choice are invested, which means these employees have little, if any, interest in the performance and outcome of their fund. This is, of course, until they reach retirement and realise the shortfall in their pension pot.
For now, employers can do little but nurture the relationship they have with their current DC pension provider and, in the process, ensure they understand their employees’ needs and required retirement income, because the consequences of failing to offer staff a fit-for-purpose default fund could be catastrophic.
Read the digital edition of our supplement, The future of default funds 2014, in full.