Default to the winner

This month Corporate Adviser wants you, the advisers who actually choose default funds, to vote for the one you think best meets the needs of an average workforce. John Greenwood checks adviser opinion on what a default should look like.



Many commentators have described the Personal Accounts agenda as the biggest single threat to private sector group pensions ever which means the pressure on the industry to get its own house in order has never been greater. But there are still problems with the defaults in place, making them an easy target for anyone who wants to criticise group personal pensions and group stakeholders.

Yet everyone agrees that employers want less regulation rather than more, as evidenced by the seemingly unstoppable drift towards contract-based schemes. But with many intermediaries charged with doing nothing more than setting up a scheme and moving on, concerns are growing at the regulators as to whether the arrangements that have been put in place are suitable for the great majority of members.

Here are the funds selected by our panel of experts as the shortlist for the Corporate Adviser Ultimate Default Fund 2008. Last year’s winner, Investec’s Cautious Managed fund has failed to make the shortlist, a casualty perhaps of a trend towards a desire for greater equity exposure rather than less amongst adviser opinion today.

Two funds, Aegon Scottish Equitable’s Universal Lifestyle Collection and Schroders’ Managed Balanced fund make the shortlist for the second year running, while a second Schroders fund, as well as offerings from Friends Provident, BGI, Ruffer, Standard and Insight all make the last eight.

The choice of default funds raises a host of issues, ranging from whether or not you believe active management is worth the extra charges, to how committed to equities or equity-like investments younger pension savers should be. Nobody has the definitive answer to the question what is the Ultimate Default Fund – only time will tell – but we hope this exercise will provide food for thought and look forward to hearing your views.

How to vote and win
Vote for the provider you think offers the Ultimate Default Fund for a chance to win a case of 12 bottles of champagne.
The Corporate Adviser Ultimate Default Fund poll is your chance to vote for the fund that you believe best fills the retirement saving needs of employees who do not have access to ongoing independent financial advice.

The shortlist
• Aegon Scottish Equitable Universal Lifestyle Collection
• BGI Global Equity (50:50) Index fund
• Schroder Diversified Growth fund
• Standard Life Pension Managed One fund
• Friends Provident Stewardship fund
• Ruffer Total Return fund
• Insight Diversified Target Return fund
• Schroder Managed Balanced fund

How to vote
You are asked to choose a single fund that you believe best addresses the challenge our panel was set. You can either vote online at or by emailing your entry to the editor at or by post to:
Corporate Adviser, 50 Poland Street, London W1F7AX. Entries must be received by close of business on Wednesday 6th February 2008.

The challenge
We asked our panel of experts to nominate a single default fund that best matches the needs of a company with 1,000 employees with an average spread of ages and skill sets for the growth stage of their pension saving – the fund is expected to be used in conjunction with some form of process to manage risk in the years before retirement. At least 80 per cent of members are not expected to be getting individual face-to-face advice and are likely to end up in the default option. The Ultimate Default Fund is to be offered through a contract-based scheme and its objective is to achieve maximum returns for members without taking risks that employers are likely to find unacceptable.

Read on to see how panel members have justified their nominations

The panel
Douglas Chrystie, director, Chancery Group
Martin West, director, Gissings
Chris McWilliam, senior consultant, Aon Consulting
Glen Campbell, employee benefits director, PIFC Consulting
Michael Whitfield, managing director, Thomsons Online Benefits
Andrew Coveney, investment director, Barnett Waddingham
Scott Wylie, investment manager, Kudos Independent FS
Tom McPhail, head of pensions research, Hargreaves Lansdown

THE SHORTLIST and their champions
Schroder managed balanced fund. Nominated by Tom McPhail, head of pensions research, Hargreaves Lansdown

A good default fund has to be a compromise of various conflicting needs. In effect it has to be the least worst option for the maximum number of people. It has to deliver good long term performance. It has to be competitively priced. It has to be well managed. Ideally it should also encourage investors to move beyond the default fund. The Schroder Managed Balanced fund meets all these needs.

As a fund of funds, investors enjoy the benefit of diversity, with the oversight to ensure active intervention can be taken in light of changing circumstances. Up to 20 per cent can be invested in a single fund, allowing the manager to back his judgement where he sees fit. By investing solely in Schroder funds, the total costs are kept remarkably low for a fund of this nature; an annual management charge of just 0.8 per cent, and a TER of just 1.18 per cent, meaning that it compares favourably with stakeholder-style charging, whilst delivering active, multi-manager style benefits.

The fund generally holds around 75 to 85 per cent in equities, meaning that it will deliver strong absolute returns. Crucially, the manager, Andrew Yeadon has a proven track record, delivering consistent outperformance over a range of time periods, and within a conservative volatility profile.

The active nature of the fund encourages investor engagement, and given that more and more investors will defer annuitisation at retirement, this fund will serve their needs more effectively. For more expert views on the shortlist, see below

THE SHORTLIST and their champions

AEGON SCOTTISH EQUITABLE UNIVERSAL LIFESTYLE FUND. Nominated by Douglas Christie, director, Chancery Group
Offering a vanilla investment solution across an entire company pension may not be the ideal solution, but we should accept for the majority of group pension members retirement will be at State retirement age and an annuity will be purchased. Therefore the first ingredient I would have is a lifestyle option. Secondly, since most pension members will be investing for 20 years-plus, and as professionals we recognise over the long term equities outperform other asset classes, a high International and UK equity content is important. Thirdly, the vast majority of individuals rarely alter their investment selection, so a fund offering a blend of passive and active investment via several fund management houses is a sensible addition. Finally, a competitive management charge is important.

I believe Aegon Scottish Equitable’s Universal Lifestyle Collection offers a reasonable compromise, offering a lifestyle option, holding approximately 80 per cent in equities, of which over 30 per cent are international. The fund offers a blend of management styles – 75 per cent of the fund is invested in a Balanced Passive fund, tracking the average investment mix of the Balanced Managed sector, and 25 per cent is invested via five active fund managers, currently Baillie Gifford, Merrill Lynch, Newton, SocGen and UBS.

By definition this fund is unlikely to offer stellar out- or under-performance, but sitting in and around the centre ground is reasonable expectation for a vanilla fund, and with nil commission amcs of between 0.35 per cent and 0.7 per cent depending on the schemes quality it is my nomination for the Ultimate Default Fund.

BGI GLOBAL EQUITY (50:50) INDEX FUND. Nominated by Martin F West, director, Gissings
Gissings would recommend the BGI Global Equity (50:50) Index fund which invests equally between UK and overseas equities. Equities will generally maximise expected returns over the long term, and a 100 per cent investment in equities is generally best practice for members more than five years from retirement.

An equal split between UK and overseas equities is appropriate to achieve sufficient diversification benefit and to take account of the concentration of large stocks in the UK stockmarket. The overseas equities should be split equally between Europe, the US and Asia. The equity funds should be passively managed. This removes the need to constantly monitor and review managers and select a new manager if the existing one underperforms. In this way manager risk and administrative complexity can be avoided by using passive managers from the outset.

We would set the pension scheme up through Friends Provident and a lifestyle programme will then move funds gradually into the Friends Provident Annuity Protector fund within five years of retirement, and finally in the last three years before retirement into the Friends Provident Cash fund such that, at retirement, the member is invested 75 per cent in the Annuity Protector fund and 25 per cent in the Cash fund. The Annuity Protector fund manages the risk of changes in the annuity market close to retirement. The Cash fund provides protection in respect of the tax-free cash element.

The switching period is an issue which requires careful consideration. The decision is primarily one of risk versus reward. Over the longer term, equities are expected to outperform bonds, a shorter switching period therefore increases the length of time the member is invested in equities, and can thus increase their expected return. However, the downside of a shorter switching period is increased risk.

We recommend that lifestyle switching should be carried out over a five-year period with switches carried out on a monthly basis.

STANDARD LIFE PENSION MANAGED ONE. Nominated by Glen Campbell, employee benefits director, PIFC Consulting
Our objectives for a default fund are heavily influenced by the two key stakeholders: the company and the membership. After a period of consultation a typical set of objectives are a clear risk profile, behaviour in accordance with risk profile, competitive pricing, performance and simplicity. Standard Life’s Balanced Profile ticks these boxes.

Whilst we do not believe that ‘one size’ can fit all, a default option has to do the best job for the inactive investor and as well as the need for growth that means reducing investment risk as the member approaches retirement assuming no member intervention.

Standard Life’s Balanced Profile offers a combination of their Managed and Cautious Managed funds. That means a consistent house view from the fund manager, Matt Savage, as the investment strategy lowers the equity exposure as retirement approaches.

That’s the theory, but does it work? The answer is – to date! – yes. We regularly evaluate the fund in tandem with independent consultancy, Asset Risk Consultants, and as at November 2007 it had exceeded a reasonable expectation of risk-adjusted investment performance in each of the last four quarters (significantly exceeding in two of those quarters) and been top quartile over one, two, three and five years for both the Managed and Cautious Managed elements.

All this at no additional charge to the scheme based AMC. What we also like about Matt Savage and his team is their willingness to work with us on employee education solutions.

FRIENDS PROVIDENT STEWARDSHIP FUND. Nominated by Michael Whitfield, managing director, Thomson’s Online Benefits
Established in 1984, this fund has been around almost as long as I have been in the financial services industry, and just like me it’s still going strong! Over the last 23 years many of my clients have happily invested in this fund, and never once have I even heard the slightest bleat of dissatisfaction – anecdotal but nonetheless important. On a personal note, I have invested in this fund and also been a happy camper, so I have eaten my own dog food so to speak. You should try it some time!

Its ethical slant has not been an excuse for underperformance – in fact it is a 1st quartile fund over five and ten years according to Financial Express. Unlike some of the ethical funds it does what it says on the box – a true ethical fund which sits firmly at core of Friend Provident’s soul. That’s good enough for me! In order to prevent a deluge of objectors, let me immediately caveat this choice by saying that my strong belief is that an employer should offer a range of default pension funds to their employees, not just one, driven through our online simple risk profiling tool which would then align the employee to one of the three default funds. Typically the default selection would include a distribution fund, a balanced managed fund and a UK equity fund, which is of course where my choice comes in.

SCHRODER DIVERSIFIED GROWTH FUND. Nominated by Chris McWilliam, senior consultant, Aon Consulting
Traditional insurer-managed funds have, in general, not served members well. This has been compounded by lifestyling profiles that often move members into lower risk assets such as long-term bonds, starting as much as 15 years before retirement, meaning members miss out on the higher growth potential of equities at, arguably, the very time they need it most.

A diversified growth fund seeks to deliver equity-like returns but with bond-like volatility. This means that members can switch into bonds much later – say three to five years before purchasing their annuity. Schroder is a well-established investment house that is conservative in its outlook. The fund is managed by the experienced Schroder Multi-Asset team, who draw their knowledge from four separate research teams (hedge funds, private equity, property and multi-manager). Schroder integrates a broad range of expertise available in-house, while using external resources where seen as efficient to do so. The process of reviewing both internal and external managers is robust and clearly defined, ensuring that positions taken within the fund are merited not only from a return, but also from a risk perspective. The fund presents a strong research-driven investment process and we remain confident in its ability to consistently outperform and use the best ideas generated by its research team. Overall it is a strong product offering, which is both well thought through and well-managed in terms of process and philosophy.

RUFFER TOTAL RETURN FUND. Nominated by Andrew Coveney, investment director, Barnett Waddingham
We are all aware that an overwhelming percentage of GPP/GSH members end up invested in the default fund on offer, even though the chances of this situation being suitable for many of those invested are slim. The situation is unlikely to change until members start to engage with their pensions, so in the meantime the composition of the default fund is clearly a significant issue. In our view, most people like making money, but not as much as they dislike losing it. With this in mind, the ideal default fund should feature low volatility and an underpinning philosophy that the preservation of capital is an important aspect of the investment process. Siegel’s Paradox tells us that if an investment of £100,000 falls by 33 per cent, the resultant fund needs to grow by 50 per cent in order to recoup the initial loss. My proposal for the default fund is the Ruffer Total Return fund. Performance data show it has returned more than 111 per cent since launch at the end of December 2000 to July 2007 compared to 33 per cent for its peer group the IMA Cautious Managed Sector. Standard Deviation and Sharpe Ratio figures are also impressive. A gradual switch to cash should start five years before SRA with our model.

INSIGHT DIVERSIFIED TARGET RETURN FUND. Nominated by Scott Wylie, investment manager, Kudos IFS
I propose the Insight Diversified Target Return fund because it aims to deliver positive returns on an annual basis, with the prospect of long-term capital growth commensurate with investment in equities and with lower levels of risk. It aims to match average returns from stockmarkets over the longer term, while potentially incurring far less risk than traditional share-based investments. The Diversified Target Return fund has the potential to achieve this due to its investment flexibility. It also has the freedom to invest wherever the most attractive risk-adjusted opportunities lie (while keeping within the boundaries of the fund’s investment policy). For example, it has the flexibility to focus on equity funds when stockmarkets are rising, although when equity markets are looking overvalued or have started to decline, the fund can move to other assets, including cash, bonds and property funds. It can also invest in absolute return funds, which use sophisticated investment techniques to generate positive returns even when stockmarkets are falling.

By expanding the range of potential investments and constantly adjusting the mix of asset classes, the investment team aim to deliver positive returns in any market conditions. The ability to move in and out of asset classes,

depending on which is most attractive, makes the Diversified Target Return fund stand apart from traditional investment funds.