Why diversification matters for auto-enrolment

  • To understand what diversification means.
  • To learn how diversification can be put into a default auto-enrolment fund.
  • To gain an understanding of why diversification matters for auto-enrolment.
  • To understand what diversification means.
  • To learn how diversification can be put into a default auto-enrolment fund.
  • To gain an understanding of why diversification matters for auto-enrolment.
Supported by
NEST
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CPD
Approx.30min
pfs-logo
cisi-logo
CPD
Approx.30min
Supported by
NEST
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Supported by
NEST
pfs-logo
cisi-logo
CPD
Approx.30min
Why diversification matters for auto-enrolment

Diversification is not a nice-to-have for pensions; it is essential in order to manage risk.

This is the belief of Mark Fawcett, chief investment officer for NEST, who comments: "Diversification is the key tool for managing risk.

"Helping clients understand how well a scheme's funds are diversified should go a long way to aiding their decision making."

Rob Booth, director of investment for Now: Pensions, agrees: "Creating the right saving environment for the millions of new savers who have now been auto-enrolled is essential.

"Too much risk in the portfolio may lead to too much volatility and sudden shocks, which have the potential to put people off long-term saving.

"Too little risk is likely to mean the potential for good long-term returns is compromised."

If the cost of advice and managing a scheme undermines the value of the investments, it is counter-productive. Jason Green

It is a fine balance to tread, but having a properly diversified portfolio enables the fund manager to negotiate carefully to ensure the right balance of risk and reward is achieved for the member.

This need for balance has been echoed by Helen Baker, partner at Sackers, who says: "In terms of what providers offer, assets should be invested so they are properly diversified, in a way that avoids excessive reliance on a particular asset, issuer or group of undertakings.

"Diversification is important in terms of both seeking returns and managing risk."

How much diversification should a client expect?

Chris Daems, director of Cervello Financial Planning, says corporate clients have a right to expect auto-enrolment investment solutions to be diversified.

He comments: "The majority of employees never change from the default fund regardless of the provider. This means they tend to be in a target date or lifestyle fund, where their asset mix is diversified but reduces in risk throughout the years."

Schemes also have to be careful about what sort of choice they are offering in terms of underlying funds, and making choices simple for the underlying member.

NEST's view is that occupational defined contribution schemes which are not well diversified will have to be able to justify such an approach to their members, regardless of how much people are saving each month.

Jason Green, head of workplace research for F&TRC, says: "The majority of members in auto-enrolment schemes will be saving modest amounts.

"Simple investors will only require a simple solution. Those wanting a more diverse approach can take a more complex and traditional solution."

This simple approach should be prevalent in both the accumulation and the decumulation stage.

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