Mastertrust Nest explains why a strong default option is crucial.
Something that should be top of the ‘must have’ list when considering a switch is the strength of the default fund, as more than 90 per cent of people auto-enrolled into a workplace pension scheme default fund remain there.
Default funds should be the best option on offer, not a last resort or backstop fund
This means default funds should be the best option on offer, not a last resort or backstop fund. The challenge is how to align what has traditionally been a one-size-fits-all single default fund model with the varying needs of a broad and diverse membership.
Targeted default fund
Mark Fawcett, Nest’s chief investment officer, says Nest’s approach to the problem of personalising the default offer to members has been through introducing a unique series of target date funds.
When a worker enrols with Nest, their money is invested in a retirement date fund based on the year they are expected to retire. Nest takes investment decisions on members’ behalf at different stages of their path to retirement. The default strategy is split into three distinct phases to ensure the level of risk taken is appropriate with the life stage of each member.
A broad range of global investments are used to diversify members’ pots and offer them good return opportunities. The split between assets in each member-facing fund is managed dynamically by the in-house team according to market and economic conditions.
The target date funds – which are constantly reviewed to ensure every individual member is benefiting to the fullest – deliver the right solution for members, given the ease of understanding, level of service and targeted investment approach they provide.
Delivering long-term value
Providers need to have a clear long-term investment perspective and not focus on short-term returns. Savers want to know their money will grow in value with the security that their savings will be there at the end of their working life. As such, prudent risk management is key.
Nest’s approach is to refrain from taking undue risk with its members’ money and provide long-term pension investment planning with a focus on risk-based asset allocation.
A strong in-house investment team can help align this strategy to members’ needs. It can also deliver value for money, making smart decisions about what to do in-house and where and how to get best value in the market.
Some of the largest and most sophisticated institutional investors and pension funds around the world have in-house specialist teams. Scale gives these providers scope to keep charges low and to offer a more flexible and tailored service.
