Default funds the best option for the majority of staff according to 92% of FTSE 100 pension funds [Towers Watson’s FTSE 100 DC pension scheme survey 2012], which operate a default investment strategy, with more than half of those having more than 90% of their members in the default option. And I agree with them.
A default fund or strategy, such as a lifestyle one, means a plan member does not need to make any active investment decisions. Their contributions go into a fund, and all they need do is periodically check how the fund is doing.
I know other schools of thought that say a default fund makes people lazy and less likely to engage with their pension scheme. Alternatives such as no default and an enforced choice of funds would, it is argued, make people responsible, active owners of their pension.
For me, that fails to recognise the reality that the vast majority of people have limited financial knowledge, as well as limited time.
My experience as a trustee, as well as on the employer side, is that for many people the default is actually an active choice. They trust the employer and/or trustees to manage their pension. They do not want to be involved in fund decisions or investment strategies and are happy to outsource this to trusted colleagues.
This puts the onus on the trustees to ensure the default is an effective, fit-for-purpose strategy for members. This is a key, pivotal role for trustees in which they are helped by professional advisers. Trustees should review the default fund they oversee regularly to ensure it is appropriate and make changes as required.