Measures for advisers to use when comparing default funds

Measures for advisers to use when comparing default funds

The performance of default funds is one of the first things advisers may look at when comparing pension schemes to recommend to their clients.

NEST commissioned financial research group Defaqto to develop more accurate measures of default fund quality and provide fairer, more impartial comparisons.

Its report, How to Analyse Auto-enrolment Default funds, highlights that while there are many ways you can compare the features of a default fund, they’re not all equal. 

To begin with, it’s worth considering how a scheme aligns with your client’s organisational values. It’s also worth understanding how its investment strategy, working practices and experience level work together in the interests of its members.

For this, having a clear, long-term investment strategy underpinned by robust governance structures is essential.

Advisers can look for independent indicators of good governance, such as type 1 and 2 master trust assurance reports. These provide assurance of the quality and standards of the scheme you’re considering. 

When determining if a provider’s investment strategy will meet the needs of employers and their workers, a good understanding of the fund’s investment management process and its responsibilities is the starting point. 

For this, advisers should look into the quality of the scheme’s investment function. Is it based in-house or delivered by external consultants, and what implications might this have for its investment strategy? Is the fund well-diversified and of sufficient size to manage risk? And does the scheme’s charge structure represent good value for money?

The scheme’s investment objectives, strategy and its management processes should also be outlined by a well-documented decision-making process. Are there, for example, robust and identifiable policies and principles in place?

And how does its performance stack up against its wider goals? Is there a framework against which to measure how it’s performing against its objectives?

Of course, some of these factors may be subjective. Advisers can get an indication of success by benchmarking a scheme against peers on performance measures, but this should be approached with caution. 

Ideally, the Defaqto report states, advisers should look at the performance of a scheme over a period of five years or more. But to get a better idea of how it performs over the longer term, it’s well worth examining a fund’s volatility as well as its returns. 

Overall, when weighing up a scheme’s strengths and weakness, how a default fund measures up against its peers is about more than headline performance figures.

These can change on any given day depending on the reporting period used. Advisers should assess how far a scheme meets their clients’ long-term needs and objectives.

To help advisers bring all this together, Defaqto’s report offers a due diligence checklist. This outlines the factors to keep in mind when helping clients determine their aims and requirements from their auto enrolment scheme.