Automatic enrolment  

What advisers can do to monitor scheme investments

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How to advise on workplace pensions

What advisers can do to monitor scheme investments

Monitoring the investments within a workplace pension scheme will ensure a scheme is not taking any undue risks with employees’ contributions and that it is continuing to meet requirements of all members.

Graham Peacock, managing director at Salvus Master Trust, says he is already seeing employers move from one provider to another because something did not go to plan or expectation.

He notes: “Advisers have a role in first selecting and then reviewing how well the workplace pension has performed.”

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Those financial advisers tasked with scrutinising how and where the scheme is invested will need to know what they’re looking out for and understand when a scheme’s investments might warrant transferring to a new scheme.

Performance snapshot

Mark Fawcett, chief investment officer at NEST, the government’s workplace pension offering, says the starting point for advisers is to understand what the scheme’s investment objectives are.

He says this means asking: “What are they trying to achieve? How likely do they think it is they’ll achieve that in a variety of scenarios? How does their approach perform in times of stress and how do they say they’ll go about it? 

“This should all be written down in a clear way so that third parties can assess the scheme’s suitability for a particular set of workers.”

He goes on: “The next step is to then interrogate how far the scheme is meeting its stated objectives and carrying out the processes it has said it will undertake. 

“Is it diversifying portfolios? Is it managing downside risk? Is it managing a wide variety of risks including environmental, social and governance risks effectively?”

Mr Fawcett points out while performance expressed as a return figure is important when assessing a scheme’s investments, this represents “only one snapshot in time”.

He explains: “What’s going to be more important to overall member outcomes is the long-term trend.”

Volatility can have a significant impact on employees’ pension pots so any signs of excessive volatility may be cause for concern.

“While risk drives return, excess volatility can be inefficient. If pots experience big falls they have to work that much harder to make up the gains,” he adds.

Lydia Fearn, head of defined contribution at Redington, suggests conducting an annual review of scheme investments and potentially more if the market environments becomes volatile.

Asset allocation decisions

What type of investments are suitable for a workplace scheme which caters for employees of all ages and with different pension needs?

In a report published by Defaqto, How to analyse auto enrolment default funds, it finds NEST spreads its investments across a greater range of managers than the other default funds. 

Figure 1: NEST 2040 Retirement Date Fund asset allocation at end of June 2016