Default funds need careful consideration says Jenny Holt, Standard Life head of investment solutions. In association with Standard Life
Q. How have April 2015’s pension reforms driven changes to default investment strategy?
A. Since the reforms were implemented, the asset mix in the glidepath of many existing default strategies exposes people to potentially unrewarded risk when their pot is biggest. The risk is that they will not benefit from the compensating change in annuity rates following a fall in the value of their funds if they do not go for an annuity.
Q. Why is future-proofing a default investment strategy so important?
A. Having a default with a structure that allows ongoing changes to be made is now much more important. Those changes can be driven by economic conditions, customer behaviour or further legislative change.
That is an advantage from an employer’s point of view because, as things change, it does not constantly have to consider changing or reviewing its default if it knows that its provider will take on that responsibility. Equally, for advisers who are designing solutions for their clients, these structures provide the flexibility to implement changes without needing to move members into new solutions that, for contract based schemes, can be challenging.
Q. How do challenges differ between trust- and contract-based schemes?
A. For trust-based schemes where trustees are responsible for making investment decisions on members’ behalf, providers can work with the scheme to move existing members into an alternative solution.
Q. What else can be done to help these members?
A. Communication and opt-in exercises are the only option. Providers can continue to work with employers and their advisers to raise awareness among members and make it easy to change their investment if required.