Schemes should help DC members in limited investment choices – USS

Defined contribution (DC) members between the ages of 40 and 60 should be offered a single default fund then helped to choose from a small range of investment options, according to new research.

The Universities Superannuation Scheme (USS), alongside Cass Business School and the University of Bristol, conducted the survey of 10,000 of its active members and found that people in that age range had similar levels of risk aversion.

It suggested that a single default lifestyle fund and a guide for those who have different risk preferences on a limited range of options with varying risk levels.

The USS research also found that members in their 40s and 50s on lower average pay had more interest in ethical investment and a higher capacity for risk but had less previous engagement with USS.

In comparison, those with higher average pay has less interest in ethical investing, a lower risk capacity and were more engaged with the scheme.

It also revealed that its female members were typically more risk averse than men.

Commenting on the findings, Cass Pensions Institute director and co-author of the report, Professor David Blake, said: “Human behaviour tells us that having too many options can often complicate decision-making or affect our desire to make a decision at all.

“Our report clearly identifies a group of members who may prefer less engagement with their pension, but are nonetheless conscious enough of where their investments should be targeted to want to exercise some degree of choice.

“Instead of offering members – who we cannot necessarily assume are pensions or investment experts – a raft of specialised options, defined contribution schemes could provide a third way, helping members to choose from a very limited range to suit their risk appetite.”

USS head of strategy and insight, Dean Blower, added: “Tens of thousands of USS members, and millions across the country, are still relatively new to saving in defined contribution schemes.

“With the power of inertia, it is critical that schemes put in place default arrangements that reflect a deep understanding of the risk appetite and capacity of their members.

“This research also shows how important it is that schemes provide members with the right choice architecture, instead of simply presenting them with an unmanageable set of options.”

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