Most DC defaults offer poor risk return

This is despite the ubiquity of the default 100% equity investment for DC schemes.

A study of 24 funds by data firm Dcisions found multi-asset funds, such as those offered by Schroders, Standard Life Investments and Newton with fees of between 50-100bps, had offered better value for money than equity funds with fees of less than 50bps.

The finding is part of the DCisions 2012 Calibrating DC Outcomes report, which seeks to overcome the difficulty of finding common benchmarks for DC funds.

Nigel Aston, business development director for Dcisions, said: “The DC multi-asset fund market, where each product has a self-selected benchmark, defies meaningful comparisons. Our risk-graded benchmarks enable fund managers, schemes and consultants to demonstrate the value these solutions deliver on a risk-adjusted basis.”

The poor risk return is on equity trackers over the past three years has been mirrored in a decline in their popularity.

Dcisions survey of 13,000 schemes with assets of more than £15bn found the use of passive equity trackers had fallen from 63% to 48% since 2006, while the use of multi-asset funds, target date funds and bespoke solutions had all risen.

The trend was confirmed by Jesal Mistry, a senior consultant at AonHewitt who said the volatility of equity trackers was having a negative impact on employees.

“There is much more of a behavioural finance link to DC than there used to be. There is now less emphasis on outcome [maximising returns]as there is on the journey,” he said.

And he confirmed that his firm was now much more likely to recommend a multi-asset fund than a passive equity tracker.

“We are talking to our clients a lot more about moving to a diversified growth fund or a multi-asset fund, because of this shift to looking at certainty. However, some clients could almost be looking at quadrupling costs for members from a very low 15bps-20bps up to half a percent or above. The message to members is very difficult and this is why it has taken such a long time to change.”