The default funds selected by some pension schemes seem to have been chosen using a path of least resistance, to minimise possible employee comeback. This is not to be confused with less risk, although unfortunately it often is.
This approach typically identifies an equity-biased, index-tracking fund as the default option. Tracking an index is not the same as real growth performance and low fees are not always indicative of best value in a long-term investment decision.
Of greater concern is whether the asset class suits the needs and aspirations of the investor. With a default fund, the investor is buying into somebody else’s decision, which is taking no regard of their particular circumstances.
Human nature is such that, given a default option, many will take it. But saving for retirement is such an important decision that it is essential to grow involvement and engagement in the process, which requires promoters of schemes to offer support and information to educate and demystify pension saving.
Most investors are very sophisticated when it comes to buying their house, a car and even a mobile phone contract.
So, rather than employers taking a we-know-best attitude and locking them into a poor compromise, we need to provide access to quality funds and to provide members with high-quality and understandable information, plus access to a source of sensibly priced advice.
David Noakes is company secretary and pensions manager at Svitzer UK