Pension scheme members ‘sidestepping’ Investment Pathways in favour of defaults

Pension scheme members are “sidestepping” the Financial Conduct Authority’s (FCA) Investment Pathways and remaining invested in scheme defaults, according to a report by Richard Parkin Consulting on behalf of the Defined Contribution Investment Forum (DCIF).

Feedback from providers interviewed for the report showed that “the majority” of members were choosing to remain invested as they already were, when given the choice of pathways, choosing their own investments, or remaining invested.

The DCIF noted that whilst this meets one of the FCA’s objectives for pathways, that members do not end up in cash after taking their tax-free lump sum, it misses their second objective of members giving more consideration as to how they use their remaining retirement savings.

The report also stated that there was a “huge variation” in the investment approach schemes used to support members who stay invested and draw income.

It found that the level of growth assets schemes target at retirement ranged from 15 per cent to over 50 per cent, for example.

Schemes were still unsure whether they should introduce greater personalisation of the investment approach in retirement, and how they would do so, following the introduction of pension freedoms, according to the report.

Furthermore, while some providers have looked to address the issue through guided solutions or offering advice, member take up had been low.

The report noted that schemes were concerned that greater flexibility could drive up costs and increase complexity for members.

Although demand could increase as members start to near retirement with bigger pots, short-term progress on personalisation was found to be limited.

The report also addressed how schemes deliver investment sophistication while staying competitive: “Competition between master trusts is fiercer than ever, with even a few basis points closely scrutinised, and cost seems the biggest driver of commercial success even when fee differences between providers are marginal,” it stated.

“In this cost-constrained environment, we question whether master trusts can deliver the best possible outcomes for members.”

However, it added that increasing scale could help, as the gap will narrow between what schemes were willing to pay for investment management and what asset managers need to charge to operate profitably.

“This report highlights the many challenges facing DC schemes as they seek to deliver great retirement outcomes for members with very different needs,” commented report author, Richard Parkin.

“Retirement planning is one of the most difficult areas of financial services. Delivering what members need in such a cost-constrained environment and where engagement levels are so low is a near impossible task.

“But with full advice out of the reach of most members, and with schemes needing to retain assets to support profitability, finding effective retirement solutions for DC has to be a priority.”

DCIF chair, Elaine Alston, added: “While the landscape for DC investments is challenging, we’re reassured by the report’s finding that, as schemes grow, many of these problems will diminish.

“For instance, as members’ pot sizes grow, they are likely to get more engaged, helping schemes to personalise their offerings. As collective assets under management grow, schemes are more likely to embrace more sophisticated investment offerings.”

    Share Story:

Recent Stories


DB risks
Laura Blows discusses DB risks with Aon UK head of retirement policy, Matthew Arends, and Aon UK head of investment, Maria Johannessen, in Pensions Age's latest video interview

Sustainable equity investing in emerging markets
In these highlights of the latest Pensions Age video interview, Laura Blows speaks to Premier Miton Investors fund managers, Fiona Manning and Will Scholes, about sustainable investing in equities within emerging markets

High-yield Investing
Laura Blows discusses short duration global high-yield strategies with Royal London Asset Management head of global credit, Azhar Hussain, in the latest Pensions Age podcast
Sustainable Investing
Laura Blows speaks to Royal London Asset Management sustainable fund manager, George Crowdy, about global sustainable equity investing