Need to know:
- Many employees’ pension investments are in default fund options that may not be the best choice for their needs.
- Employees need to think about fund performance and fees before deciding to move money.
- Employers can help by providing information and even financial advice to help staff make decisions.
The underlying motivation behind any workplace pension scheme is to ensure staff can retire, once they get to a certain age or point where they no longer wish to work. But many employees have little understanding of how their money is invested, and are potentially missing out on higher returns by remaining in a scheme’s default fund.
Workplace pension schemes offer a wide range of funds, although the exact range will depend on how it is set up, says Mark Futcher, partner and head of DC at Barnett Waddingham,. “Contract-based schemes tend to have a much larger fund range, placing more responsibility on members to navigate the options and do their research,” he says.
“Trust-based schemes tend to have more restricted, curated fund ranges. A typical master trust might have up to 30 funds. They will typically try to cover a wide range of asset classes and, by limiting the number of funds within each asset class, apply more oversight to give members confidence the funds are working as they should.”
Investment options
Most organisations will offer between eight and 12 investment options to their employees, says Steve Case, financial and insurance consultant at Insurance Hero. “These could include a range of low-cost investment options such as equity index trackers that charge an average of 0.15% to 0.35% annually, managed bond funds, and/or lifestyle portfolios that automatically reduce risk as retirement approaches,” he says. “Since each provider of these fund options handles the interface for selecting funds, the performance reporting, and the compliance documentation related to providing the fund options, there remains very little administrative burden to the business.”
There are, though, things that employees should consider, including whether they have the time to monitor investments, says John Mullally, group risk and healthcare consultant at Cartwright Employee Rewards. “If [an employee is] a confident investor, the areas [they] would focus on would be the performance of the fund and the fund manager,” he says. “In addition, [they] would want to keep an eye on the annual management charge and fund management charge. A total of 1% is typical but some funds can charge as much as 1.75%. These level of percentages may appear to be quite small but if [they] have a pension pot of £100,000, it can add some expense that would be better off in [their] pension.”
Beyond the default fund
Employers can also help by providing more information around the options that exist beyond default funds. Jason Cannon, corporate consulting client team leader at Gallagher, explains: “Clear guidance on how a growth or adventurous fund differs from a balanced or cautious option, what asset classes their pension is exposed to and how diversification can protect against market volatility helps employees make informed decisions about their long-term savings.”
Particular attention should be given to how to adjust investments over time, says Daniel Taylor, director at Trafalgar House Pensions Administration: “Members need to understand the importance of derisking as they approach retirement, and that so-called low-risk options like bonds aren’t always as stable as they seem,” he says. “They also need a clearer idea of how market movements can affect their pot over time, and how to match their investment approach to their goals.”
Financial advice and education
In some cases, employers can facilitate access to more formal financial advice. Jonathan Watts-Lay, director of Wealth at Work, explains: “Historically, there have been concerns over helping people gain access to advice but, if done correctly, it does not carry the risk many presume. Having access to an adviser that has been vetted by the employer or scheme not only provides security, but the adviser will be more familiar with the structure of the scheme to provide a better quality of advice for members.”
The right approach for any business will depend on risk appetite, budget, reward philosophy and the existing knowledge and needs of its people, says Andy Lewis, a partner at law firm Sackers. “One thing to remember is that successful programmes are not one and done; things work best when there are regular touch points throughout the employee’s savings journey,” he says. “And it’s helpful to set pensions investment education in the wider context of retirement goals, contribution choices and other savings.”