If recent experience is anything to go by, auto enrolment has taken over from RDR as the number one hot topic of conversation with advisers. Most want to talk to us about how they can make the most of this opportunity and tend to focus on employer duties, staging dates and eligible employees.
But once we’ve covered the “what, when and who”, the focus quickly shifts to the “where” – the scheme investment default.
So what should a good default fund look like? The best starting point for understanding what makes a good default fund is the DWP paper “Guidance for offering a default option for defined contribution automatic enrolment pension schemes”.
This paper, published in May 2011, sets out guidelines for advisers and employers to follow when governing, designing, reviewing and communicating the default option.
Interestingly these guidelines align closely with guidance published in October 2010 by the Investment Governance Group (IGG), which was established by the Pensions Regulator with the aim of importing investment governance in DC schemes. These guidelines are as clear a steer as you can get from the regulator that it expects providers, advisers and employers to improve the design and governance of DC investment for members.
Why is guidance necessary? One of the conditions of an auto-enrolled scheme that is used to satisfy employer duties is that members must not be made to choose their investment funds.
Ensuring good outcomes for members is a priority for the regulator and the DWP guidelines are likely to be just the beginning of improving investment in DC pension schemes
In other words, a default fund must be made available. It’s likely that current scheme defaults will vary widely. Some will use traditional managed funds; some will be in global equity funds; while others might follow a de-risking path in the run up to retirement.
The DWP’s concern is to ensure that default funds must be a “sound and suitable investment savings vehicle for individuals”, and they feel that setting out a good practice guide is the best way of ensuring good member outcomes are achieved.
So what are the guidelines? As you might expect they’re pretty extensive and therefore time consuming. For the majority of employers the guidelines may appear to be an additional burden at a time when they’re more likely to be focused on trying to make a profit in a hugely difficult economic period. The areas covered include ensuring that the scheme default and other investment options are suitable for the scheme membership; that they take into account members’ risk profiles and time horizons; that there are processes in place to review the default and investment options at least every three years; and that information is communicated to members regularly.
This presents an opportunity for advisers. Both the DWP and the IGG have agreed that many of these responsibilities can be delegated to an adviser or provider.
This gives advisers the opportunity to discuss the need for a strong governance framework with employers and trustees. It also allows the adviser to explain the help they can provide in meeting these guidelines.
Ensuring good outcomes for members is a priority for the regulator and the DWP guidelines are likely to be just the beginning of improving investment in DC pension schemes. In fact the DWP have already said that if they are not satisfied that these guidelines are being met they will introduce legislation to protect members’ interests.
Progressively from 2012, every employer will be required to have a pension scheme in place. Every one of those schemes will have a default option available. And experience tells us that the vast majority of members will end up in it. So selecting, reviewing and effectively communicating the default will be essential if we are to secure good outcomes for members.
