Employers must justify default fund selection

Employers must be able to justify why they selected the default fund for their defined contribution (DC) pension scheme and have processes in place to review it.

If they do not, they must question their scheme governance, said Stephen Bowles, a representative of the Defined Contribution Investment Forum (DCIF), during a panel debate on why employers must help staff to retire during Employee Benefits Live 2013 at Olympia, London.

He explained that employers must remember that they are responsible for making investment decision for the majority of employees that use their pension scheme’s default investment strategy, so these must be monitored over time.

Ensuring employees have a sufficient pool of assets to draw on at retirement is vital, because people are typically living longer, said George Emmerson, representative of the DCIF.

“How employers help employees to retire is to have good-quality pensions, think about employees and ensure [the scheme] is flexible enough to cope with the [changing] economics of the world, added Emmerson.

“The default has to be able to accommodate different asset classes. Individuals need to be comfortable with how much they are putting into the fund and the fund [itself].

“A default has to be able to weather different economic storms and needs constant monitoring.”

Ensuring staff can afford to retire is currently a huge issue for employers, so clear considered communication with employees is vital.

 Simon Chinnery, chair of the DSCI, said: “How you can get people to save more is a critical question.

“There is a lot of good thinking around [pensions and investments] but if it is not communicated well, it can be missed.”

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Finmeccanica achieved 98.8% take up of its pension scheme by keeping messages really simple.

Martin Flavell, vice president, human resources at Finmeccanica, explained that some staff may be unwilling to save into a pension scheme due to their perception of more pressing financial needs such as mortgage payments. In these cases, employers could explain the long-term value of pound-for-pound payments, to demonstrate the long-term value of each, for example, once tax savings and investment returns have been taken into account.