Published in Professional Pensions' DC World, 20 March 2008: “Please sir, can I have some more?” Oliver Twist may have been referring to his daily gruel when asking for “more” but many companies have recently made a similar request when reviewing their DC fund range. At one time, conventional wisdom suggested that more funds meant more choice and more member satisfaction. Times have moved on and professionals now suggest that fewer choices will lead to less confusion and improved decision making.
Many providers now offer fund platforms which have access to several hundred investment funds. Should responsible companies and trustees be offering all of these to their employees/members? Options now available are:-
- Full access to all funds for all members.
- Full access to all funds but ”promotion” of a narrow range of funds.
- A simple narrow range only (6-10 funds).
Each option has its pros and cons.
While offering a wide range of funds may give improved choice, it can prove to be overly confusing to many members. This may lead them either to make a bad choice of funds or to avoid making any choice at all.
The “promoted” range has intuitive appeal. Around six to ten funds are specifically ‘highlighted’. These funds have been chosen by the trustees or the company, with the help of their advisor, as a range of funds appropriate to meet most members’ needs. The scheme literature will focus on these funds when discussing how members should go about building an investment strategy. However, members are also given the option to access the other funds on the provider’s platform. The benefits of this approach are that it satisfies the need for simplicity of choice for the vast majority and also satisfies the (often very influential) minority that demand wider choice.
But by promoting only a small range of funds, are the trustees or employer effectively giving advice? We do not believe so. Given that the employer or trustees have taken professional investment advice regarding the funds they promote, it is unlikely they could be criticised.
The third option is much simpler for members. They have relatively few fund options to choose from; therefore investment decisions become more straightforward. In this case the question is whether the trustees or the employer could be accused of not providing enough choice? As long as the trustees or employer communicate the aims of the scheme, we do not believe so. The employer’s aims will be to provide a pension that best balances the needs of the majority of employees and keeping the governance costs (including the cost of reviewing funds) at a reasonable level. One way to accommodate members wanting to exercise wider choice is to allow these members to exercise full or partial transfers from the main scheme to individual arrangements such as SIPPs, where a member can choose investment in a wider range of investment opportunities.
What is our experience in considering these issues with our clients? We have generally advised against a wide fund choice, arguing that any benefits are outweighed by increased confusion. The second and third options have appealed to a number of clients and we are already helping a range of schemes to implement these types of strategy.
Many employers and trustees assume that because their employees are very active at making decisions in other areas (such as flex packages), they will be similarly active in managing their pension. Typically this is not the case.
We have carried out detailed analysis of the investment habits of members of a number of our defined contribution clients. One client, with a relatively sophisticated and highly skilled workforce might have expected to see quite active member decision making. However,
over 94% of members opted for one of the two lifestyle options, with only 6% actually opting to self-select from the 18 funds on offer; - of those self selecting there was evidence of some potentially inappropriate investment strategies:
- ‘Scatter-gun’ selection (investing a small contribution to every fund) was evident in several cases.
- ‘Chasing performance’ (selecting funds on past performance grounds) was suspected. Members generally had a high allocation to the property fund (which had been the best performing fund for many years).
- ‘Head in the sand’ investing was suspected. Some members, only a year from retirement, were invested heavily in equities and property (where liquidity may be an issue).
- more worryingly, almost 40% of members were contributing the minimum amount into the scheme (a combined employer and employee rate of 8%).
This scheme is not atypical. We are working with many of our clients to help them address some of the above issues, in particular, whether the fund choices made by self-select members are appropriate for them. Simple direct communication from trustees and employers can help members reconsider the issues. In many cases the best help that members could receive to make the most appropriate decision is some form of face to face advice. However this is costly and employees and employers are reluctant to meet these costs.
The questions raised also emphasise the importance of co-operation between the trustees, the employer and the adviser, not only in examining the range of funds they offer but also in considering the overall structure of the scheme.
“Less” may be the new “more” for DC but helping members in their decision making remains key to the role of trustees.
Mark Jaffray, Investment Consultant