Two thirds of contract-based defined contribution (DC) pension schemes in the FTSE100 offer members 50 or more investment options, says Watson Wyatt.

The financial consultant's annual FTSE 100 DC Pension Plan Survey also found, however, that less than three per cent of trust-based DC schemes offer this many investment options. Two thirds of trust-based schemes in the FTSE 100 also offer ten or less investment funds.

"There is a clear difference in investment strategy between contract-based schemes, which continue to offer excessive choice, and trust-based schemes that don't," said Gary Smith, senior consultant at Watson Wyatt. "Excessive investment choice can really deter joiners as well as lead to members making wrong fund choices and unintentionally taking on inappropriate risks and cost. In addition to exposing their members to these risks, contract-based schemes are adding considerably to their governance burden by offering so much choice."

Three quarters of trust-based schemes now use an investment gateway or platform to deliver their investment strategy, of which over 40 per cent use a scheme-specific 'white-labelling' structure.

"There is strong evidence of greater fiduciary focus, especially among trust-based schemes, with trustees taking greater control of investment strategies," Smith said.

The survey also shows that over half of FTSE 100 DC schemes have over 80 per cent of their membership in the default investment option, and over 90 per cent with this option offer a lifestyle approach. Half of default funds operated by contract-based schemes are actively managed, and there has been an increase in the number of specialist funds available to members of these schemes.

"The use of specialist investment products is becoming steadily more popular, as they become easier to offer through white-labelling and investment gateway structures. This is a significant and positive development as DC members can now access the benefits of diversification, however they need to be aware that some of these choices come at a price," Smith warned.

Meanwhile PricewaterhouseCoopers LLP (PwC) has released research showing that many DC pension pots are now worth less than the cash contributions to them. The analysis also shows that employers are facing a dilemma when it comes to supplying defined benefit (DB) schemes with risks they cannot bear, or DC schemes which are not delivering.

Raj Mody, partner and chief actuary at PwC, said: "Employers are facing pension challenges at every turn and, with market conditions beyond their control also undermining defined contribution schemes, it must seem that there is no escape from pension pressures."

- Pensions Age March 2009

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