Modern Workplace pension schemes are often Defined Contribution plans, such as Group Personal Pension Plans or Group Self Invested Personal Pension Plans. When someone joins this type of pension plan, the pension provider needs to know how that money should be invested.
When the money reaches the pension provider, it is invested right away. The fund that members see their money in is designated at a scheme level, and Department for Work and Pension (DWP) rules mean that pension schemes should have default funds that are suitable for members. Workplace pension providers are happy to take the responsibility for this for their ‘standard’ default funds, but where an employer and their advisers have put in place ‘bespoke’ default funds, additional governance must be set up. It’s therefore really important to check if you have a standard or bespoke default fund to ensure that you comply with the rules.
These default investment arrangements tend to reflect the way that the majority of people view investment and risk, meaning that they are designed to be suitable for someone with a ‘balanced’ or ‘medium’ attitude to investment risk. They usually prepare members for taking benefits, by changing the way that members are invested as they get closer to the point at which they are due to take benefits. This is usually achieved by reducing the amount invested in shares, and increasing the amount invested in other assets. The period where they start to change a member’s fund varies from scheme to scheme, but can be anything from 15 years to just a handful of years before members are planning to access their pension savings.
The fact that members often do not know with certainty when they will access their pension savings is another reason to help members engage more with their savings. This is to make sure that changes to the way that their fund is invested happen at the right time for them. Due to the way that the State Pension Age is gradually increasing, the target retirement age on workplace pension schemes is usually not linked to State Pension Age. Sixty-five is a common target retirement age, but members can request for this to be changed to when they plan to access their pension savings.
Studies have shown that automatic enrolment has resulted in more people saving into pensions (because it reduces the complexity of the decision as to whether or not to save into a pension). An unintended consequence of this is that the ‘decoupling’ of the decision on whether to save and, if so, how much and into which fund means that people who are pension scheme members can procrastinate over those decisions. They often put off a decision on whether to review the contributions they make and into which fund until a later date. Also, it is possible that people see the default contribution level and investment allocation as an endorsement of that level, either from their employer or the Government.
These studies are backed up with recent statistics (February 2020) provided by the Pensions Regulator, with over 95% of people being invested in the default fund. This certainly highlights the importance of the default fund being appropriate for membership.
An annual check on the ongoing suitability of the default fund is part of the Brunsdon Financial workplace pension governance service. Please contact us if you would like any further details.
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Source 2 – IFS working paper: