How investment choices matter for auto-enrolment

“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.

Risk levels

But as Matt McGill, head of corporate propositions at Aviva puts it, certain key features should underpin its design.

“Growth, and growth in excess of inflation, is clearly a priority but so is minimising unpleasant shocks.”

He explains: “Employees won’t want to see sharp falls in the value of their pension savings, which could potentially lead them to opt out from saving altogether.

“While it could be argued younger members can take on more risk as they have more time in which to recoup any losses and riding out the ups and downs of markets, in the early years it is contributions, not investment strategy, that has the biggest impact on the value of their pension fund, reflecting the relatively small size of their fund.

“Consequently, reflecting the need for members to continue contributing, the investment design should seek to avoid exposing their pension fund to sharp falls that could cause them to opt-out,” he reiterates.

The default funds offered by the pension providers are often positioned as a solid, relatively uneventful choice, suitable for most people and not requiring too much maintenance.Alan Morahan

Ms Fearn cautions taking too little risk in a default fund can be as bad as taking too much and the timing of the risk is often of equal importance. 

She reasons: “Members who have a long time horizon will be able to ride the market more than those who are very close to retirement, so higher risk and the potential for higher return should be included at the start of the retirement savings journey. 

“Lower risk and potentially lower returns should be considered the closer a member gets to retirement.”

Whether a fund is considered low or high risk, any auto enrolment pension scheme is going to expose its members to the vagaries of the stockmarket, which can go up and down at any time.

Default differences

Punter Southall Aspire’s managing director Alan Morahan refers to data which suggests employees should delve a little deeper into how their employer’s default fund is invested.

“The default funds offered by the pension providers are often positioned as a solid, relatively uneventful choice, suitable for most people and not requiring too much maintenance,” he points out.