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Default lines

Default funds are the topic of conversation in pension circles with the Personal Accounts Delivery Authority scrutinising this crucial issue ahead of the 2012 launch.

Default funds have long been associated with negativity, so much so that there have been calls by Axa for the name “default” to be ditched altogether. It has a point.

Nine in 10 employees choose default funds because they do not have the inclination to select any other option.

Performance has also been an issue. Before the days of lifestyle strategies, many default funds were bog-standard balanced managed funds offered by the big insurers. These enormous funds frequently lagged their benchmarks and were regularly outed as poor performers in pension surveys.

However, despite the cloud of negativity that surrounds default funds, you might be surprised to learn that their performance of late is not as bad as perceived.

The latest survey from Pension DCisions suggests employees have been neither worse nor better off by ticking the default box. In a year when most asset classes fell on hard times, the average default funds lost a quarter of value in the 12 months to the end of December 2008 – the average return was minus 23 per cent (the FTSE All-Share fell 29 per cent).

Yet the role of the default fund is becoming increasingly important because more and more people are going to rely on it to fund their retirement.

There are now just three FTSE 100 firms that have open defined benefit schemes following BP’s recent move to close its scheme to new employees.

The demise of the final salary scheme will only get worse given the findings of a survey of 1,000 companies by Pricewaterhouse-Coopers. Almost all who responded said final-salary pensions were “unsustainable”.

This shift will have significant implications, not only for personal accounts, but also for the defined contribution arena.

One of the problems of default funds is where the responsibility lies. Is the onus on the employer, trustee, employee or the adviser?

With a trustee-based scheme it is more or less clear-cut that the trustee has a huge role to play in ensuring the default is up to scratch. But in the contract-based scheme it is a grey area. Depending on who you talk to, there are arguments that everyone to some degree has some responsibility, including the employee.

Attempts to educate employees on the fund choices available and the questions they should be asking when it comes to their retirement pots have proved futile to date. With the best will in the world, there is little evidence to suggest this will change any day soon.

Providers, consultants and advisers admit that member inertia means getting the right default in place is crucial. It is why all eyes will be on the eventual design of the personal accounts default proposition.

Pada has to get this right. The cost of the fund could have implications. The proposed low fee suggests that the authority may have little choice but to offer passive investment strategies for the default offering. I just hope that the retirement pots of millions of people are not going to be hindered because of a few basis points here or there.

But Pada’s responsibility goes beyond personal accounts. The pension industry is watching closely.

The personal account default fund will, in all likelihood, be perceived as “Government-sanctioned” and therefore adopted by many workplace schemes that fall outside the Government initiative.

It may be indicative of its name, but Pada really has no choice but to deliver. It could be the difference between our future pensions system being a success or failure.

Paul Farrow is digital personal finance editor at the Telegraph Media GroupMoney Marketing

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