Has your default fund changed with the times?

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The behaviour of investors is changing. New pension freedoms and low annuity rates mean people are less likely to buy an annuity on retirement.  In addition, an increasing number of savers don’t retire on the date they planned or phase gradually into retirement.

As investment patterns change, it’s incumbent on employers and their advisers to review their workplace pension default funds and make sure they remain fit for purpose.

Less appetite for annuities 

Traditional default funds are designed on the basis that most employees buy an annuity on a set date.

However figures released by the Association of British Insurers show that annuity sales continue to plummet.  In January-March 2015 providers sold 20,600 annuities vs 74,100 in the same period of 2014. 

This collapse in sales is not a blip. Research conducted by YouGov with over 200 financial advisers found that only 2% of those asked believed annuities would lead the market in 2025.  

Make sure your default fund isn’t defunct 

The default fund issue is critical.

First, the vast majority of people in a workplace pension remain in the default fund over the course of their career. Although your workplace pension may offer a broad range of investment choices, the reality is that 72% of employees stick with the default fund(Opens new window)

Secondly, workplace pensions are obliged to meet the needs of members and demonstrate the governance to make sure it remains fit for purpose.

Different default options

The changing needs of savers means it’s important to offer a range of strategies to company pension schemes, so employers can choose one that matches the needs of their typical scheme member. 

This is why we’ve designed our new Workplace Target range, 10 funds designed specifically for use as scheme defaults. 

Five of the funds are aimed at schemes where the typical member wants to keep their options open as they near retirement. These funds use Aegon’s Flexible Target strategy.  This means they automatically reduce risk while maintaining diversification in the final six years before retirement. The aim is to cushion retiring investors from the worst consequences of a market fall while making sure they aren’t reliant on the success, or otherwise, of just one type of investment.

Four of the funds are aimed at schemes where most employees still plan to buy an annuity. As investors near retirement these funds use Aegon’s Annuity Target strategy to move into long-dated gilts and cash to preserve the amount of annuity income their pension pot can buy. 

Finally, there is a Cash Target fund which reduces risk then makes a wholesale move into cash.  It’s designed for those who plan to cash-in their pension pot, for example these savers may have separate defined benefit pensions they plan to use as their main source of retirement income. 

Falling annuity rates and the wider range of retirement income options now available mean more people will want to keep their options open as they get closer to retirement so we believe most workplace schemes will favour the Flexible Target strategy.

Reviewing your scheme default

As an employer, the onus is on you to understand the needs of your typical workplace scheme member and select your default fund based on their needs. This is an important decision because every new member will automatically be placed into the default fund and 72% of them will stay there*.

Employers and advisers must ensure their scheme’s default is in sync with employees’ needs. Aegon’s new Workplace Target funds help make sure they have the right funds to choose from. 

*NAPF, Default Fund Design in DC Pension Schemes. September 2013.

Photo of blog author Nick Dixon, Investments director

Nick Dixon

Investment director