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Need for guidance with default funds

28 September 2017

One of the cornerstones of the government's pension automatic enrolment regime has been the obligation for employers to offer an appropriate default fund - because employees cannot be required to make an investment choice themselves.

But, although ticking this box represents an important first step, the compliance requirements by no means end there.

It is important to regularly keep tabs on the performance of the default fund to ensure that it remains suitable. It may be time to switch if a fund hasn’t been meeting its targeted objectives or, even if it has, if other rival funds now offer a better match to the needs of the workforce.    

Indicators of engagement, like the number of employees in the default fund and the number paying more than the mandatory minimum contributions, also need to be considered.  

Such monitoring is often done through a formal governance structure, and may involve the help of an external pension expert like Chase de Vere.      One important issue to be considered during the process is whether the ‘glidepath’ offered by the default fund remains appropriate.

Prior to the introduction of the new pension freedoms in April 2015 such glidepaths typically focused on switching employees’ pension assets away from equities towards safer havens like gilts or cash in the years leading up to their intended retirement point. This protected against the possibility of a stock market downturn seriously reducing purchasing power at the point that someone wanted to buy an annuity.

However, because the new freedoms have removed the requirement for money purchase scheme members to take an annuity and have enabled them to dip into their pension pots as and when they want to, taking such a drawdown approach has apparently become the most popular route. Indeed, it is commonly reported that 70% to 80% of employees are opting for it.

For this reason there has been a recent trend for major pension providers like Aviva, Scottish Widows and Standard Life to link the glidepaths on their default funds to the drawdown process rather than to annuity purchase.       However, Chase de Vere doesn’t believe there is currently enough data out there to conclude that most people won’t take an annuity, because the figures that have been coming out so far could well have been distorted by the fact that many people are accessing small pension pots. There may therefore be a greater requirement for a guaranteed level of retirement income than generally imagined.  

Furthermore, even if a clear majority do in fact opt for drawdown, the approach will definitely not be suitable for everyone. Additionally, because employees have been able to choose the age at which they retire since the abolition of the Default Retirement Age in 2011, they may find themselves subjected to a glidepath that starts switching assets in a way that is nowhere in proportion to the retirement age they had in mind.     

So, whatever the default fund and glidepath that is being offered, it is never going to suit everyone and there is a clear need for it to be accompanied by individual advice or guidance at certain important trigger points.

One of these trigger points will be when an employee is approaching the glidepath phase in the last five to ten years before retirement, and another will be just before retirement itself.

Offering educational seminars and workshops at these times can provide generic guidance to help employees understand the key issues and decisions that need to be made. 

Alternatively, some employers may wish to go a stage further and offer one-to-one face-to-face personal advice with a professional independent financial adviser (IFA). This could be funded by either the employer or the employee, or by a combination of the two.

Chase de Vere can assist with offering both guidance and advice because, unlike many of our competitors in the employee benefits space, we also have an IFA arm.   

If you would like to find out more about how Chase de Vere can help you with the governance process for your default fund or with providing your employees with financial education programmes or one-to-one personal financial advice then please do not hesitate to contact Chase de Vere on 0345 300 6256 or complete this simple form and we’ll call you.