Default funds: More than one way to achieve value

In a panel session today, Lynne Rawcliffe, UK scheme pension manager at chemical manufacturing company BASF, said even though the £230m defined contribution scheme’s default fund was the most expensive of the range of funds on offer, she considered it good value for money.

The scheme’s Moderate Guaranteed Income LifePlan is a typical lifestyle fund that targets an annuity at age 65. It is invested half in equities and half in diversified growth assets, up until five years before retirement.

BASF's decision to go with this kind of fund was based on the question, “Is it for members who won’t engage or the best option for the majority” – ultimately deciding it was for the disengaged members, as the member base is very diverse.

'What is members’ perspective?', is our biggest question

Lynne Rawcliffe, BASF UK Group Pension Scheme

There is an advantage in going through an investment platform, Rawcliffe said, as the platform provider shared the scheme’s interest in low investment charges.

“They have an interest in negotiating the lowest charges they can because all of their clients pay the same management charges,” she said.

However, Rawcliffe said the BASF pension team’s biggest question is on member perspective, and the scheme is planning an online questionnaire to collect feedback from active and deferred members.

She said it is considering re-evaluating the current default fund. 

Defaults at the heart of DC success

Tim Banks, managing director of fund provider AllianceBernstein’s pensions strategies group, said investment defaults will define ultimately the success of defined contribution.

“Defining value for money with regard to investment default is as important in defined contribution as defining your own investment beliefs,” he said.

Defining value for money with regard to investment default is as important in defined contribution as defining your own investment beliefs

Tim Banks, AllianceBernstein

Banks said management charges are not always straightforward to understand and trustees had to break down what the charges consisted of within the 0.75 per cent charge cap in order to get and deliver value for money, and questioned whether trustees and members knew the true cost of their default investment strategy.

“In defining value for money and whatever measure you decide to use, you need to understand not just the headline price but how much you spent on each different element,” he said.

Banks asked that investment management should be a ring-fenced "frontline" service: “We’ve got expensive platforms and administration, and cheap investment,” he said.

Agility as valuable as investments

Paul Bannister, chief executive of non-profit mastertrust provider BlueSky, said a big part of value for money is the investment options, but noted there are other factors that can create value for money, including not having shareholders.

Income generated through BlueSky’s activities other than administrating its scheme, such as third-party administration and consultancy, feeds back into the pension scheme and therefore benefits members, said Bannister.

This type of set-up has helped to either reduce or keep annual management charges the same, while ultimately the scheme targets an AMC of 0.5 per cent, “but not for an off-the-shelf lifestyle product”.

Agility is another area where value for money can be achieved. Bannister said the scheme moved 12.5k members and £225m in a single working day, resulting in transition costs of "as low as" 0.1 per cent of member funds.

“The non-profit administration will continue forever because it’s built into the product. The members are the ultimate owners,” he said.