Defined contribution default funds are not appropriate for all master trust members, the Pensions Policy Institute has said.
In the third edition of The Future Book: unravelling workplace pensions, published by the PPI today, 5 October 2017, the PPI noted that a large majority of DC pension savers remain invested in default funds, in particular those who are auto-enrolled. This may not be the right option for all, particularly those looking for higher returns in the long-term.
The research found that 99.7 per cent of master trust members are invested in their default fund.
“The majority of default funds in master trust and GPP schemes are lifestyled, though this may not be the most appropriate investment strategy for everyone. Some of those planning to continue investing their savings after retirement might benefit more from a fund which prioritises growth even in later years,” PPI head of policy research Daniela Silcock explained.
Instead, she said that a lifestyle fund is more suited to those who aim to convert their savings into an income at retirement through an annuity for example.
The research found that more DC funds, including master trusts are looking towards diversification by increasing investment in alternatives such as real estate, infrastructure and commodities as bonds and equities are becoming less secure.
“There is more focus on the use of Diversified Growth Funds (DGFs) as an alternative for lifestyling. Diversified funds are less volatile and may therefore provide better long-term protection from loss than equity/bond/cash funds. However, DGFs do not provide the same opportunity for high returns as funds more heavily invested in equities and may be less appropriate for those with high risk appetites,” Silcock added.
The report was commissioned by Columbia Threadneedle Investments and provided commentary, analysis and projections of future trends in the DC landscape.
Columbia Threadneedle Investments head of pensions and investment education Chris Wagstaff said: “We are delighted to have commissioned the PPI’s The Future Book for the third year running. The Future Book provides extensive insight into the current and prospective future state of play of UK workplace pensions as well as the challenges faced by those increasingly reliant on their Defined Contribution pension pots in retirement.
Wagstaff added that the research demonstrated that default fund design “can fundamentally affect retirement outcomes”.
The PPI’s report revealed that DGFs only have a six per cent chance of incurring a loss in the first five years of saving, compared to 23.5 per cent for high risk funds and 13.3 per cent for a low volatility lifestyle fund.
“We know that people with low risk appetites and low incomes are more likely to be put off by losses incurred during the early stage of pension saving and opt out. Therefore it’s crucial that they are provided with an effective default option that is unlikely to incur losses early in their savings journey if we want to avoid compounding the nation’s long-term savings problem,” Wagstaff concluded.