More than a third of default fund providers are failing to meet regulatory guidance asking them to clearly state their product’s objective, according to a new report that highlights communications failings in the sector.
Fiduciary manager Cardano’s research also found that providers do not make a link between the contributions made by members and their expected retirement benefits.
While much of the defined contribution default market revolves around inert savers, regulatory interventions such as the Financial Conduct Authority’s asset management market study will increase the pressure on providers to be transparent and communicate well.
Even for the ones who are reasonably disengaged, make it easy for the five seconds of their time that you have got
Ralph Frank, Cardano
Comms do not meet expectations
However, the Cardano study of 29 of the UK’s largest DC schemes found that 38 per cent of propositions do not clearly state their objective to members, while others declare different objectives for the same third-party investment offering.
Ralph Frank, head of DC pensions at Cardano, said: “We think that from a buyer perspective it’s pretty difficult to get the basic information that you need to make a decision.”
He said the failure to satisfy the guidance could be down to a lack of pressure from competitors to do so.
The report was not able to identify a single offering that linked strategy to probable outcomes, with retirement calculators not usually tailored to the specific fund in which the member is invested.
It also found that 58 per cent had no clear performance objective in their communications, and that a similar proportion do not define what risk means for members.
Inertia not an excuse
Communicating effectively with members is frustrated by the lack of engagement inherent in the automatic enrolment system. But Frank said the industry could not rely on this as an excuse.
“Being in the default can actually be a choice… but even for the ones who are reasonably disengaged, make it easy for the five seconds of their time that you have got,” he said.
Richard Birkin, director and head of the DC solutions team at consultancy KPMG, agreed that schemes and providers have not been “that great at member communication”.
Birkin said default design could also be improved by using data to better segment default members according to their needs, and target them with tailored communications efforts.
Eighty-three per cent of the offerings studied by Cardano aimed for a specific retirement date, rather than focusing on the member’s retirement age, or their financial situation.
Pru amends DC default, as experts warn against ‘wait and see’ approach
The Prudential staff scheme is due to amend its DC default fund this year in light of the introduction of freedom and choice, amid concerns some schemes are choosing to wait for retiree data to help them design their default.
“The reality is, very few people have a hard and fast 65 cliff-edge retirement now,” said Birkin, but added that better practices are now feeding into the market.
Where communicating performance relative to benchmarks and outperformance targets is concerned, providers should assume that members are interested, according to Mark Ashworth, chair of Law Debenture Pension Trustees.
“The starting point would be, ‘Well, why not share that?’ The only reason not to would be if it takes you into too much detail,” he said.
