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FSA calls for simple default funds

The FSA has urged the industry to focus on developing simple default funds ahead of automatic enrolment.

The regulator’s comments came after the Association of British Insurers announced at its pensions conference in London today that it plans to work with the Investment Management Association to develop a framework for “good” default funds for defined-contribution schemes.

The trade bodies will produce a joint discussion paper later this year outlining key areas relating to the design, implementation and delivery of default funds.

Speaking at the conference, FSA pensions and investment policy manager Milton Cartwright said: “Automatic enrolment is a world where inertia is the policy position. You cannot expect people to make choices, so putting the resources into designing a good default is really important and it should be kept under review.

“It would be unhelpful to have default funds with lots and lots of investment funds because that creates false focal points of competition for providers.”

Aviva UK Life chief executive David Barral said: “The place I would start when designing a default fund is to have a deposit account with a bank.

“We need to strip this right back to basics and get rid of the complexities. You can then build out from that but it should remain as simple as possible.”

ABI director of life, savings and protection Stephen Gay said: “There has not been enough focus yet on default funds. With many new auto-enrolment schemes on the way, and around 80 per cent of scheme members invested in default funds, it is essential that their governance is as good as we can make it.

“The ABI will be working with the IMA on a series of initiatives to build industry standards, and we will start by producing a joint discussion paper on critical areas relating to default fund design, implementation and delivery.”

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. surely the point of a default is that you do not choose.

  2. Interesting one this, if defaulting to a deposit fund is the route taken the AE funds will never provide sufficient growth to make the [ultimate] 8% combined contribution anything like enough. So will those auto-enrolled ultimately opt out because they won’t see the point?

    Is this the ultimate problem with trying to cut advice out of the equation?

  3. why is the FSA still messing about with the what we want on auto enrolment. they should have done this years ago. stop messing around and start talking to the public about what is coming now!

  4. They keep on about default funds and simplified products. There is no simplified product involving assets that can fall as well as rise. That’s why you need advisers. How can you put people into a part equity fund without advice? If hundreds of thousands of people are placed in these funds and we have a massive market fallout in equities and bonds will they be recompensed?

  5. Hence why the suggestion is that you start with a vehicle based on interest rather than equities.

    Im giving you my money for 20 years, is a decent interest rate really such a ridiculous request?

  6. The NEST Scheme is just another one of the communist style social experiments, like stakeholder products and the RDR in general, trying to take advice out of the equation for savings, investments and pension / income in retirement planning.

    The Life Offices who think they are going to benefit by acquisition of millions of clients are labouring under a misconception, if the cost is going to be as published, then why should anyone invest in it, if all it can promise is “default ” funds and no advice process to monitor progress each year and advise clients to switch during hard economic times to less equity based investment.

    I think that most investors would be better served to invest in their own schemes outside government control and get employers to contribute.

    Small firms take note, your costs will rise, probably resulting in having to either downsize your firms or lay off workers, what price auto enrolment then?

    The government and the FSA have got it all wrong and the man on the Clapham Omnibus would be appalled at how they are trying to rip people off.

    Funding a proper level of state pension benefits with appropriate levels of investment via NI contributions would be more sensible, still that is regarded as another form of taxation.

    I would not want to engage with this rubbish on behalf of a client or a business owner.

    it is such a daft idea, that when it eventually goes pear shaped, who will be picking up the bill ? IFAs yet again.

    “We are continually faced by great opportunities, brilliantly disguised as insolubale problems”

    NEST isn’t a problem that can be solved it is a complete and utter screw up from inception.

    Does any adviser worth their corn really think this scheme is a good idea?

  7. @ Patrick Schan is right – what if these funds lose money, perhaps 50% and more? But there is a simple answer. If any fund can fall in value then one of the projections of future value should show this. Having three examples of positive growth is misleading. Problem is, as soon as people actually see what happens if their investments fall in value, they will not want to know.

  8. Julian Stevens 13th June 2012 at 9:50 am

    For all its hidden faults (which, I suggest, are largely fixable), the ideal fund for most investors who have little if any idea of the difference between a gilt and an equity, could have been With Profits.

    The concept of a fund with underlying guarantees and gains locked-in on a year by year basis would surely appeal to scheme members who have no grasp of how investments work?

    The trouble is, though, that life offices abused and exploited their With Profits funds for their own ends. In consequence, the FSA’s hatchets and sledgehammers approach to “reforming” With Profits has all but destroyed it as a viable investment medium.

  9. Julian – absolutely right !

    The demise of the mutual didnt help either !

  10. You are right Julian, good with profits funds would have worked well here. Not PC however. Default funds with any significant equities content, given the very high probability of serious short term volatility, will be a compensation scandal in the making. Deposit based funds will produce complaints too if the markets ever do really move forward. No easy answer here except to stay well clear.

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