DC Default Funds Must Manage Investment Risk Effectively

02 May 2012 (PLANSPONSOREurope.com) – Given that most new entrants on to Defined Contribution Schemes following the UK’s introduction of auto-enrolment will opt for the default investment fund it is critical that investment risk is successfully managed, according to a report from the Pensions Policy Institute (PPI). 

In its submission to the Work and Pensions Select Committee on Governance and best practice in workplace pensions, the PPI says automatic enrolment international experience suggests that most scheme members will simply opt to remain invested in the default investment fund and consequently its design will bea key determinant of the final pension income achievedby scheme members. The report adds default fund design will need to carefully balance risk and returns and manage investment risk in the run up to retirement.  

Meanwhile the report also emphasises:  

• Higher than the minimum levels of pension contributions required under automatic enrolment legislation fromindividuals, employers and the Government through tax reliefif individuals are to achieve adequate levels of retirementincome;  
• The importance of transparency in the fees and charges levied by pension providers for both scheme members andemployers so that members and employers can make aninformed choice about the value for money of their pensionscheme and competition among providers is enhanced;  
• Given the complexity of the decisions faced by scheme members in converting their pension pot into an income at retirement and that these decisions are for the long-term and in the case of an annuity purchase are irreversible, it is essentialthat scheme members have the information and advice thatthey need to make an informed choice at retirement.  
• That the introduction of a single-tier flat rate state pension will reduce, but not entirely eliminate the interaction of incomefrom workplace pensions with the state means-tested benefitand tax system.  

Graham Simons
editors@plansponsoreurope.com