Robert Reid: Default funds no longer fit for purpose


Hearing of the issues Pension Wise is facing made me reflect on the fact communication remains the key challenge for our sector, particularly in terms of the written word.

We are in the midst of putting a new pension scheme in place, where the majority of the workforce comes from Eastern Europe. The feedback from having the announcement letters translated into Hungarian and Polish has been incredible. It is all about taking the time to view things from the perspective of the end user.

But engagement is not just an issue at inception. If anything, it is even more problematic at retirement. Pension freedoms introduced more options to consider and I have to wonder how this must look to the end consumer. Is it unlimited choice or unending chaos?

We see group pension schemes today with no research of demog-raphics and no attempt to determine the mood of the membership. Do they want an annuity, drawdown, cash or a mix of the three?

It is clear we need a default by purpose and that purpose could be single or multi-purpose. If this is to be delivered successfully people will need guidance or, in some cases, advice.

There is no doubt that as defined benefit wanes The Pensions Regulator will start to put default funds under the microscope.

To avoid any issues, the employer needs to consider the risk profiling of members coupled with research into their intentions.

Of course, this is not going to be a one-off piece of research, as many will find themselves changing options as life evolves. This brings me to my phrase “default by purpose” where selection is focused more on benefits than investment performance.

Clients will want fixed income (an annuity), a flexible income stream (drawdown), a lump sum or more likely a mix of two or three. In a single purpose scenario, the default needs to align with a single purpose whereas in a multi-purpose scenario fund allocation must be split based on a mix of options.

Default funds are no longer fit for purpose. After all, default is singular and planning is plural. Most importantly, we need to solve the communication challenge with better engagement.

If I buy electrical goods someone will always ask whether I want the extended warranty. That decision is clear: if I take the warranty, I have comeback over a long period and if I do not then I am on my own if it breaks in a year or two. Why don’t we use the same terms in the advice world (instead of the likes of “execution only”) so people know when they have comeback and when they do not?

I would like to close by restating that longevity for me remains the elephant in the room. The rejection of longevity or sustainability is equally dumb. My dog finally passed away at 17 years old the other week. He behaved as if he was a pup almost right to the very end. But then he had no danger of running out of funds, just biscuits.

Robert Reid is a director at The Ideas Lab