The auto-enrolment of employees into a workplace pension was a scheme introduced by the government to ensure people were setting aside an amount of their salary each month for their retirement.
It was also a means to encourage younger workers to develop a long-term savings habit.
Of the many millions of employees who have been auto-enrolled into a pension scheme, the majority will remain invested in the default fund – perhaps due to apathy they will not move their money into another pension, or simply because they forget to make any changes to the fund they are being invested in.
But the default pension fund should not only help UK workers regularly save and build up a pension-shaped pot, any default fund should also aim to grow employees’ savings by making the right investment choices.
This is especially important if the government wants to keep as many workers auto-enrolled as possible – poor investment choices could prompt employees to opt out.
Meeting members' needs
Lydia Fearn, head of defined contribution at Redington, explains: “It is a requirement for auto-enrolment schemes to have a default investment arrangement for members.
“It is therefore crucial that it is structured in a way that meets the needs of most of the members.”
She says: “In our experience a huge majority of members invest and remain invested in the default throughout their working life, mainly because they do not feel equipped to make their own investment choices.
“Members will be relying on the growth within those investments to help increase their pension savings to allow them to retire when they choose to do so, therefore it is critical to make sure the investments are working for the members.”
The government pension scheme, the National Employment Savings Trust or NEST, states on its website the number of retired people will rise by more than a third by 2050 but there will be relatively fewer people saving.
Mark Fawcett, chief investment officer at NEST, believes: “The auto-enrolment policy is based on the understanding that people don’t always act in their own best interests.
“That’s why, for one reason or another, often because life just gets in the way, most of us don’t start saving for retirement when we should.
“For the same reasons, most auto enrolled pension savers stay in the fund they’re first put in.”
This is not necessarily a bad decision, as long as the default fund is doing what the saver wants it to do for them.
“Each asset class has different risk and return characteristics so investment decisions need to be made on the basis of understanding how each one can help deliver the fund’s objectives,” Mr Fawcett adds.
The default auto enrolment fund will, to a certain extent, be a ‘one size fits all’ type scheme, as it takes into account the varying ages and salaries of its members.