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Categories:Investments

Judgement day for defaults

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Once again, Corporate Adviser wants you, the advisers who shape the pension investment strategy of the nation’s employees, to vote for your favourite default fund. John Greenwood reports

The shortlist

  • Aegon Balanced Plus Select
    Nominated by Joe Swanson, head of corporate benefits, Company Rapport
  • Nest Retirement Date Funds
    Nominated by Paul Todd, head of investment policy, Nest
  • Schroder Managed Balanced Fund
    Nominated by Laith Khalaf, pension investment man., Hargreaves Lansdown
  • Scottish Life Governed Range
    Nominated by Patrick Connolly, head of communications, AWD Chase de Vere and David Taylor, managing director, Towergate Financial London
  • Scottish Widows Pension Investment Approach
    Nominated by David Cooper, client manager, Creative Benefits
  • Standard Life Global Absolute Return Strategies (Gars) Fund
    Nominated by Katherine Lynas, director, Camradata

They contain the retirement hopes and aspirations of millions, and they are selected by you, the corporate IFAs and employee benefit consultants that implement the nation’s workplace pension solutions.

Now in its sixth year, the Corporate Adviser Ultimate Default Fund competition continues to take the pulse of the DC investment strategy for the mass market.

Default funds have never been under such scrutiny. Auto-enrolment duties hit the first wave of employers in a matter of months, prompting the Pensions Regulator and the Department for Work and Pensions to take a considerably higher interest in the contractbased world.

And competition has never been so fierce. Contract-based providers are adding increasing levels of governance to the default funds they offer, while master-trusts are springing up with their own innovative solutions for their own particular target sections of the workforce. Nest, too has thrown down the gauntlet to the industry, and we have therefore included it in our shortlist. The trend away from passivity and towards oversight saw ScotLife’s Governed Range make it two years in a row when it took the crown last year. Two of our nominating advisers chose the same firm this year – an accident that sees that winning fund get two champions in this year’s competition.

ScotLife’s offering is not the only fund on this year’s shortlist with a watchful hand at the tiller – but it is perhaps telling that we have no trackers making the cut this year.

Corporate Adviser readers know and understand better than anyone else what a good default fund should look like, and this online poll is our opportunity to see where the default debate is taking us. This is your chance to have your say in the great default fund debate, and win a case of 12 bottles of champagne. The shortlist for this year’s poll has been selected by our panel of experts and extends across a range of solutions available to advisers. It may not be definitive – but it does give a representative view of some of the more popular approaches to defaults available on the market today.

THE SHORTLIST - how the experts justify their nominations

Aegon - Balanced Plus Select Portfolio (Risk Level 5)
Joe Swanson, head of corporate benefits, Company Rapport

We feel that although the fund is potentially more expensive than other default funds, this is a truly value added proposition that makes full use of the usually superfluous extended fund range offered within many group personal pensions. Although there is no lifestyling arrangement offered with this fund our solution is to offer phased transition on an age related default basis into the lower risk Select Portfolios during the 10 years prior to retirement.

We have selected this fund for a number of reasons. We like its independent research - funds are selected and monitored by OBSR and Mercer. OBSR build and manage the portfolio range. Both companies sit on Aegon’s Investment Advisory Committee.

It has a well defined, rigorous and structured process of fund selection and portfolio formation. Portfolio is reviewed monthly and rebalanced daily.
Fund selections are not restricted to Aegon funds, so there is no investment house bias or limitation. Funds are mostly specialist managed with few internal funds, offering a mix of active and passive managed funds.

It also offers true diversification - different fund managers with different styles and portfolio composition are selected within each sector/asset class.

Nest - Retirement Date Funds
Paul Todd, head of investment policy, Nest

Nest went live only recently, so why might our Retirement Date Funds be considered alongside other entrants to this competition?

We’ve carried out an unprecedented amount of research to create an innovative approach aimed at keeping members saving, managing risk and growing their retirement pots in a way that’s truly built for them: Nest is different by design.

Nest Retirement Date Funds, yearly target date funds for every year a member might retire, aim for investment returns in excess of inflation after all charges over the long term, while the objective of the Growth phase of the funds - in which many members pots will be for decades - is to target CPI plus 3 per cent after all charges.

We think a focus on protecting the real value of members’ contributions after charges is crucial, while delivering a sophisticated investment approach at a transparent low charge is imperative to prevent savers’ pots from being swallowed-up by charges.

We believe our focus on member outcomes and the value of their pot and income in retirement represents an innovation in DC investing.

Our expected economies of scale mean our members can access a sophisticated approach to managing risk that’s delivered via leading fund managers at every stage of their saving with Nest.

Schroder Managed Balanced fund
Laith Khalaf, pension investment manager, Hargreaves Lansdown

Many balanced managed funds simply mirror other funds in the sector. In 2011 the difference between a top quartile and a bottom quartile fund was just 2.8 per cent, evidence of not so much a race to the top as a perfunctory lumber to the middle. Little wonder then that doubts abound over the value of ’active’ management. The Schroder Managed Balanced fund takes a different approach and gives the highly experienced team the freedom to invest as their convictions dictate, a truly active mandate. This resulted in almost a fifth of the fund being held in cash in July as Schroder’s senior economists predicted trouble ahead. Few other balanced funds would be bold enough to diverge so much from the consensus weighting, to prioritise absolute returns for members before their peer group ranking. The lead fund manager is Johanna Kyrklund, who actually runs Schroder’s own pension fund, so their money is where their mouth is. The fund invests in other Schroder funds, from top managers like Richard Buxton and Leon Howard-Spink, offering exposure to their expertise at half the price of their individual funds. The proof of the pudding is of course in the eating. Over 10 years the fund has returned 75 per cent for investors; for what it’s worth, 20 per cent ahead of the average balanced fund.

Scottish Life Governed Range
Patrick Connolly, head of communications, AWD Chase de Vere

There are a number of reasons why Scottish Life has had continued success. The increased flexibility around the lifestyle switching really helps to meet employer and advisers needs in an increasingly complex market while the choice of risk graded strategies means that it is ideal for meeting different member risk profiles.

However, it is their track record in providing a robust governance framework that really makes them stand out from the crowd. Scottish Life is committed to keeping ahead of the chasing pack and has plans for further developments to the investment proposition in 2012. It is this desire to continually improve member outcomes that earns them my vote as the Ultimate Default Fund.

Also nominated by:

David Taylor, managing director, Towergate Financial London

Default fund design has moved into the modern era and with the advent of auto enrolment it’s more important than ever that the Ultimate Default Fund recognises the latest thinking on how to improve DC member outcomes.

We believe that this fund’s combination of risk graded lifestyle strategies, automatic rebalancing, strong investment governance process and three year track record provides members with a market leading default option.

Scottish Widows - Pension Investment Approach
David Cooper, client manager, Creative Benefits

To meet the brief simplicity in approach must be combined with choice and good value. Scottish Widows’ pension investment approach meets these three goals.
Simplicity is delivered through good governance and seamless processes. Choice is provided through a range of pre-set portfolios. Value is provided through competitive annual management charges and low transaction costs.

The good governance structures mean investors do not need to worry about day to day investment management. Scottish Widows take active responsibility for ensuring the funds remain fit for purpose.

The simple three tier approach to risk and return, namely Cautious, Balanced and Adventurous is instinctively comprehensible and well supported by good information. When married with the automated risk reduction steps in the approach to retirement, which incur no charge, investors receive good growth prospects and stability in purchasing power.

Importantly, these two key outcomes are delivered without the need for any individual fund selections or complicated decisions by employees and Scottish Widows offer ongoing choice through a wide internal and external fund range.

Standard Life - Global Absolute Return Strategies fund
Katherine Lynas, director, Camradata

At CAMRADATA we are used to seeing DB schemes transfer across into the DC world. And one type of fund is set to make a big splash when it comes to DC solutions, the dynamic multi asset fund.

Dynamic multi asset funds change their asset class exposure to reflect the economic environment, exploit market inefficiencies and reduce risk. The goal over the economic cycle is to better invest members’ funds so they are only in positively performing asset classes. The fund managers are agile and decisive when it comes to moving funds’ assets, and the members reap the rewards of this with higher returns and lower risk against traditional solutions.

That’s all well and good, but who is top of the pops when it comes to this fund type? We have developed a seven factor quant screen, which identifies consistently good funds over a three year track record. And the numbers stack up - Standard Life’s GARS fund is head and shoulders better than the competition. This fund now has enough of a track record to show it can operate around the economic cycle and it has been in the top three of Camradata IQ’s quarterly performance reports since the report’s inception.

The Challenge

VOTE FOR THE FUND YOU THINK DESERVES THE TITLE… and be entered into the prize draw to win a case of 12 bottles of champagne

Vote for single default fund, or fund solution that best matches the needs of a company with 1,000 employees with an average spread of ages and skill sets for the growth stage of their pension saving - the fund is expected to be used in conjunction with some form of process to manage risk in the years before retirement. At least 80 per cent of members are not expected to be getting individual face-to-face advice and are likely to end up in the default option. Exercise your vote to be entered into the champagne prize draw. Only advisers are permitted to vote.

Click here to vote

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