Written By Craig Pritchard
Since October 2012, employers have had a legal duty to enrol eligible employees into a workplace pension scheme, contribute on their behalf, and place them into a default investment fund. The selection of a default fund is a complex one and, once selected, it is important that it is reviewed on an ongoing basis (at least annually) to ensure it continues to meet the needs of employees and their valuable pension savings.
From an employee perspective, automatic enrolment has resulted in many more of us joining a pension scheme, however, the vast majority of us remain very passive around our retirement savings. As an example, few employees regularly increase their personal contribution to increase provision, and circa 95% of scheme members remain in the scheme default investment fund selected by their employer.
So why, as an employer or a pension scheme member, should you proactively consider your default investment fund?
As a default fund selector or investor, you need to know that not all default funds are created equally. Pension providers have differing views on many factors, such as the investment style to be used (active vs passive), the equity exposure of the fund (this ranges from 40%-85%) and the timescale over which investments will de-risk (reduce risk) as an employee approaches retirement.
Returns across default funds can also vary massively, for example a study by Tax Incentivised Savings Association (TISA) in 2019 found the performance of the 20 largest pension provider default funds over 3 years ranged from 3.4% – 11.9%. In monetary terms, what does this mean? See table below.
| Gross Salary | 8% – as set out by auto enrolment | Term | Annual Return | Projected Pension Pot |
| £30,000 | £2,400 per annum | 30 Years | 4% | £139,988 |
| £30,000 | £2,400 per annum | 30 Years | 1.2% | £87,084 |
The difference of nearly £53,000, highlights what happens if you or your employees find yourself in the wrong default fund – it’s a life changing sum of money and may mean employee choices as retirement approaches are limited. For example, do employees compromise on what they hoped for in retirement or work longer?
Aligned to default fund selection is their impact on society. Every day we’re reminded of a drive to a net zero carbon approach. People are now becoming increasingly conscious of their impact on the world and there aren’t too many of us who don’t fear what state we’ll leave our world to future generations.
As so many employees and employers, elect to use a default fund as their preferred investment choice I wonder what concerns, if any, people have about how their savings are invested on their behalf and the sustainability of those investments? Interesting some of these issues are raised in a study entitled “Investing in a Better World”*. Some of the highlights found:
- 70% of people want their investments to avoid harm and achieve good for people and the planet.
- 44% of people don’t feel confident explaining what their pension scheme does with their money.
- 57% of people say they’re interested in learning about what impact their pension has on the world.
- 56% of people would opt for a fully or partially sustainable pension.
- 14% of people are happy to continue with a traditional approach and have no wish to consider sustainability.
- 52% of people would invest more into their savings if they knew their money was having a positive impact.
These findings highlight a general willingness to participate in helping to improve the global outlook – both in terms of the environment but also the conditions in which we work. And, most important of all, the need for education of how to participate because we lack the time and confidence to implement the changes required.
A concern of many investors is that investing using ethical and sustainable solutions might lead to returns being sacrificed. Research would suggest otherwise (Morningstar, July 2020). Evidence suggests those funds employing a “responsible” filter, have provided returns superior to their more traditional peers. Perhaps this shouldn’t be a surprise as we see more companies evolve their products and working conditions to meet the demand of its consumers.
Can the default fund and sustainability walk hand in hand? The answer is yes, because some insurance companies are ensuring their funds adopt a responsible overlay, but the reality is it’s at the behest of to whomever you invest your money with. Even then it may not be enough to satisfy investors who may want their capital invested in a specific way.
Demand for the incorporation of a sustainable approach will lead more and more default funds to adopt this approach. However, default funds will still be a “one size fits all”, performance will vary and will it do what you want? Perhaps the time has come for you to consider the implications of your scheme default fund for you and your employees?
If you would like to discuss workplace pension default investment funds or your personal pension investment fund selection, please reach out to our Partners& strategic partner, Integrity365 on 0117 450 1300 or visit www.integrity365.co.uk.
*A study carried out by the UK Department for International Development (DFID)
Written By Craig Pritchard
