Three fund options will replace the default fund for auto-enrolment schemes, Legal & General has predicted, as a number of providers continue reviewing their default fund strategies.
At present, most auto-enrolment schemes have a set default fund that assumes a member is going to buy an annuity at retirement.
However, the radical overhaul of the pensions system means the current system of default funds will no longer be applicable in most cases, industry experts have said.
Adrian Boulding, pensions strategy director at L&G, told FTAdviser he believes there will be three options instead of one default fund.
The second two options will have different combinations for the new income drawdown and cash related options that will be available to members, Mr Boulding predicts.
The three options will be as follows:
• The typical default DC fund for auto-enrolment typically begins with a 100 per cent investment in equities and switches before retirement, usually to 75 per cent cash and 25 per cent invested in a corporate bond fund, and this will carry on as one of the options;
• Those members who take their pot as cash will begin with 100 per cent equities and similarly arrive at a destination that is 100 per cent cash too; and
• The fund for those members who select income drawdown will start with 100 per cent equities and typically end with three asset classes: high yield corporate bonds, high yield equities and infrastructure funds.
Ultimately, a new default fund will be set by auto-enrolment schemes, dependent on the choice members make when presented with these three new options, Mr Boulding says.
He said: “What I think will happen is that trustees or governors of schemes will decide which is most likely for members and will get into a conversation in the last ten years about what members want.
“They will then set the default fund at what most members want and will say there are other funds which members could switch into.”
FTAdviser revealed in March this year that a number of providers had placed their default fund strategy under review following the Budget announcement.
These schemes included Nest, Now: Pensions, The People’s Pension, Scottish Widows, Aegon and Aviva.
At the time, Legal & General Investment Management told FTAdviser, their default fund strategy, the Multi Asset Lifestyle Profile, would not be reviewed.
However, the firm now says it is under review.
Paul McBride, head of governance at LGAS Corporate, said: “In summary, we are reviewing our default strategy in the light of budget changes.
“That includes reviewing our own default and setting acceptable parameters for any bespoke default requests we receive from employers.”
He added that LGAS is currently undertaking “extensive research” with scheme members, sponsors and advisers.
Mr McBride said: “We are currently less concerned with the growth phase of our existing default, and more concerned about the de-risking glide-path now that annuity ‘near compulsion’ is no longer, we are taking nothing off the table until we have concluded that research.
“Research is telling us a number of things, there are divergences of opinions. Once we’ve done the research we will assign the default fund that is most suitable for all demographics involved.”
Nest will be consulting over the summer, and will publish initial results from their consultation in the autumn.
The final review results will not be finalised until next year.
Now: Pensions told FTAdviser its review is concluded.
Scottish Widows, Aegon, Aviva and The People’s Pension all confirmed their reviews are still underway.
Darren Philp, head of policy at The People’s Pension said: “The end outcome will be driven by what tax laws emerge in the consultation. If we have managed to complete the review by Autumn we will be doing very well.
“The tax rules could impact on what members might be able to do at retirement.”
