Next year marks the start of the busiest period for auto-enrolment. The pensions sector has a new year’s resolution to stage more than a million small employers.
That’s a lot of organisations that want to find a quality pension scheme for their staff.
Information on default funds is crucial for so many groups; from employers who want good retirement outcomes for their workers, to advisers who want to know they are giving well-informed advice
With nine out of 10 workers set to stay in their default fund, choosing a scheme with a good default is vital. High-quality default funds are important not just for employers and their workers, but the sector more broadly.
Auto-enrolment is great at getting people to start saving for retirement, but a high-quality scheme can build the confidence people need to continue the habit.
So how can the sector recognise a good default? Nest commissioned financial research group Defaqto to develop more accurate measures of performance. Their report, How to analyse auto-enrolment default funds, is the first of its kind. So what does it tell us?
What should you look out for when comparing funds?
There are many ways to compare the features of a default fund, but they are not all equal. Some are more insightful than others. Defaqto’s report outlines the main differentiators to look out for:
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Investment management procedures and responsibilities
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The implications of in-house and outsourced management
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The clarity, robustness and repeatability of investment decision-making
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How well defaults are performing against benchmarks and peers
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The suitability of the default and identifying value for money
When considered together, the report suggests that these differentiators indicate some providers and funds are ‘clearly more competitive than others.’
How to compare apples with apples
When comparing investment performance, it can often be the case that apples are compared with oranges. But the report identifies several indicators to avoid this.
For example, Defaqto use Sortino ratios to differentiate between ‘good’ and ‘bad’ volatility; that is volatility caused by high returns versus volatility due to low returns.
In addition, looking at information ratios can lead to a more accurate picture of risk-adjusted performance. There are several other examples in the report that provide a more accurate picture of the default funds that are available.
DC default funds: Experts divided on best strategy
Huge variations in the risk profiles and investment strategies of DC default fund offerings are putting savers’ retirement provision at risk, according to a recent study.
Information like this is crucial for so many groups; from employers who want good retirement outcomes for their workers, to advisers who want to know they are giving well-informed advice.
Ultimately, using clear comparisons about how funds and schemes stack up should help workers saving for their retirement. That is something we can all raise a glass to as we start auto-enrolment’s busiest year yet.
Paul Budgen is director of business development at mastertrust Nest
