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DC schemes urged to reconsider default investment design

Claire Felgate

Four in five (81 percent) employees trust their employer to make good investment decisions on their behalf. With over 90 percent of pension savers investing in the default of their DC scheme, employers must accept the responsibility to offer defaults that help members achieve their lifetime savings goals. The highest priority for members is investment return cited by over a third (37 percent). Contributor Claire Felgate, Head of UK DC – BlackRock

In light of new research, BlackRock calls upon employers to revaluate their approach to default design for DC pension schemes, to ensure that they are focussed on delivering outcomes to help members retire comfortably. BlackRock’s annual DC Pulse survey, reveals that four in five (81 percent) pension savers trust their employer to choose good investments for them; a significant group considering the vast majority (92 percent) of members are invested in default schemes.

Many respondents go one step further: nearly three in four (72 percent) think their employer should assume responsibility for selecting pension investments on their behalf, partly because of the complexities of pensions and investments. While 85 percent believe they should make more of an effort to understand the investments in their pension, three in four (77 percent) say they are not confident in their knowledge about investments to manage their savings themselves.

When asked, the vast majority (79 percent) said they are indifferent to where their pensions are invested, as long as they deliver a reasonable return – investment returns came out as the  main priority for DC members, cited by over a third (37 percent) – above costs and charges (11 percent) and increasing company contributions (21 percent). Surprisingly, despite little engagement with the underlying investments, ESG is moving up the agenda. Nearly a quarter (23 percent) think their employer should include ESG investments into the default scheme, and just under two in three (64 percent) believe it should certainly be an option offered to them.

Commenting on the survey findings, Claire Felgate, Head of UK DC at BlackRock, said: “Pensions are complex and the default is a good solution to take some of the big investment decisions off the member. Even though no default will provide the perfect strategy for every individual, poorly considered ones can increase the potential for employees to undershoot their desired outcomes. While it’s tough to address all elements of scheme design – from investments, to administration, to communications – with the number of members in the default, investment design is key to achieving a comfortable retirement for members.

Employers need help in how best to help members along their retirement savings journey and our experience and insight tells us that default investments should have a clear, member-focused objective. They should be flexible enough to adapt to regulatory change while also avoiding excessive cost and complexity. Many DC schemes investment strategies could benefit from being reviewed, ensuring they are fit for purpose and delivering the best possible outcomes for members. The objective in the early years where growth is a priority, for example, may differ in the years before retirement where protection and downside risk are a higher priority.

I would urge those responsible for investing member’s retirement savings to consider the investment design of the default. Are there clear investment objectives for members at different stages of their journey to retirement? Are these being implemented in a cost-effective manner to deliver the expected results? All of these questions should be considered.”

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