CA Summit – Default funds ripe for overhaul

In a panel debate on auto enrolment and product design, delegates agreed that the shape of default funds needs to be improved, given the fact that around 90 per cent of DC scheme members fail to make an active choice of fund.
Paul Macro Towers, Watson senior consultant, said: “There are far too many defaults out there. Most schemes have a default fund and a selection of other funds. There is a middle ground where people want strategy choices.”
Macro said lifestyle funds should be all about the member’s entire career and wanted to see them move away from applying only during the last 10 years. Brian Gabriel, Aviva director of corporate benefits said there was a need for a safety net via much more flexible lifestyling.
Some delegates backed the idea of default funds providing a lock-in, in a similar way to with profit funds, but without being called with profits and with no involvement from actuaries.
Duncan Howorth suggested that advisers could provide operation and construction of default funds and that people did not understand the impact of inflation. “You need to invest in a way that’s long term and deals with inflation,” he said.
Robin Hames, Bluefin head of TMR, said: “Would we all be having this discussion if we were at the back end of an equity bull market?”
Ray Martin of DHL said the industry was focused too much on investment choices. “We need to focus on what people pay in and outcomes. We need a governance body that monitors the default fund,” he said.
Andrew Cheseldine of LCP said research showed that those who self select got poorer outcomes than those who go into the default fund and that there was a risk with some so called ’investment ’solutions’ that they were too complex and inappropriate for the membership.
He said LC&P had been looking at diversified growth funds and reduced volatility. “If you look at members’ investment decisions, you can tell when they started. Their investment decisions were dictated by the prevailing market conditions.”
Brian Gabriel said there was a need for better governance and Macro said he could see the attraction of passing responsibility to someone else. But Cheseldine warned: “Getting the great and the good to do governance doesn’t guarantee good performance. Member nominated trustees can be very good. Big names from the industry tend not to be challenged.”