In my earlier blog on this subject, I argued that while the responsibility for the choice, construction and management of the default option could be shared between a number of Fiduciaries , there should be a defined outcome of this work – a target of a perfect default.
The starting point for any DC Governance Committee working on the default is a Risk Register. The Risk Register is constructed from the various answers to the question “what could possibly go wrong?”.
The difficulty that most DC Governance Committees have is they are not experienced in anticipating the problems that surround the investment and operation of default options and receive insufficient help from those who are.
So here are my top ten default perils.
- Out of market risk on fund switches (lifestyling)
- Lifestyle targeting the wrong retirement age
- Overly expensive fund management costs
- Tracking error on index funds
- insufficient diversification of accumulation fund (too much volatility)
- Inappropriate matching funds prior to de-accumulation
- Mis-management of members expectations (poor education)
- Inability to receive proper information on the above
- Inability to influence the behaviours of managers (funds and administration)
- Incapacity to carry out and document the control functions to manage the above.
Which is why we have Fiduciaries – there is no way that the average bunny is going to carry out that level of due diligence for themselves. We’ll leave it to the Badgers (and perhaps some bears who have good guidance) to decide their own investment strategy , us bunnies are putting our trust in our trustees, employers and ultimately default providers to make sure that defaults are properly managed.
I know that there are organisations that are addressing these questions and doing a good job on our behalves. I have a great deal of confidence that this is precisely what NEST are up to as they design and implement the default option for the great new Scheme that will be available to us all from next year.
I am not so confident that many of the providers of group and stakeholder pensions have either the internal controls or are being properly monitored by their clients or their client’s advisers.
If you are in the default fund of your group personal pension you have the right to ask these questions. Go on – try it! Why don’t you ask your trustees, or if you are in a GPP or Stakeholder Pension your employer, whether these issues are being monitored and how?