Richard Butcher commented at PLSA invest that he didn’t understand why we used the word “default” to describe the fund that is used by 90% of scheme savers. He’s right – “default” is not a way to describe something you value.
If you look at synonyms for “default”, the words get no better
So how did we get here and what can we do to improve naming?
I think that the use of the word “default” was purposeful and it was designed to dissuade savers from using “default funds”.
There are three reasons for this
- Trustees and providers thought that people who self-selected funds were engaging with their pension , the self-select v default ratio became a measure of success with a high level of self-selection indicating a well-informed workforce
- Most DC schemes started out advised and advisers regarded their job as tailoring investment strategies to individual needs. This is still the case – which is why self-invested personal pensions are promoted by financial advisers.
- By the time auto-enrolled workplace pensions came along, the phrase “default” had become embedded in the pension glossary
So how do we promote this “default” today?
As a member of a defined contribution workplace pension scheme or a stakeholder pension scheme, you are offered a range of investment funds for investing your contributions. The range of funds can allow you to build up a collection of funds for investing contributions in your pension pot. But choosing funds can be a daunting experience.
If you don’t want to choose funds yourself, you can decide to invest in the scheme’s default fund. This is a fund that has been chosen to meet the investment needs of most of the scheme’s members. If you make no investment choices, contributions to your scheme will be automatically invested in the default fund. You can normally change your mind later and switch to a different fund or funds or redirect future contributions. ” This is from TPAS website”
Of course the phrase “you can decide to invest in the scheme’s default fund” isn’t quite what happens. The reason 90% + of us are in defaults is that we don’t decide and many of us don’t know that we’re investing in funds anyway! The “default” still carries with it an association with choice that harbours back to the days when we believed we could make every investor their own CIO.
Not all defaults are the same but AgeWage research suggests that on average they invest 80% in equities, 20% in bonds and have an annual management charge of 0.75% pa. The convergence of funds around these metrics suggests that there is such a thing as a default default with outliers to the 80/20 approach being NOW pensions – with a much lower exposure (35%) to equities. Some default funds now change over a saver’s lifetime (target date funds) , while some savers see their default fund being swapped around as they approach retirement (lifestyle).
Far from being neglected, some of the default funds are highly managed – to the point where performance can be compromised by the cost of these transitions. Far from being the ugly ducklings, defaults are now the stable stars.
Is there an alternative to “default”?
Well let’s repeat the synonym exercise using a more positive word than default, let’s start with “standard”.
To these adjectives we can add “house” which is common for beers, wines and views. The trouble with “house”, “normal” . “ordinary” and “standard” is that they don’t pander to the expert in us. Don’t we want to extraordinary – special – A*?
Well why not try it on yourself?
Is the house wine alright?
For most of us it is just fine, not least because it is probably the cheapest on the list, benefits from bulk buying and is the wine on which the house bases its reputation. We might look at the rest of the wine list but 90% of us would probably be happy if our host said, the house wine is fine (and we’ll have tap-water while you’re about it).
There is perhaps a fourth reason for defaults not being called the “house” fund. It suggests that the person who chose or designed that fund is is accountable for it.
Since “accountable” is preciously close to “advised” in the risk-manager’s lexicon, it is unlikely to be adopted by risk-averse organisations (such as insurance companies).
Many trustees and employers are still trying to distance themselves from the outcomes of their retirement plans, fearful that they, like KPMG, risk being accused of creating an expectation. Recent market events show how easily expectations can be dashed.
Trustees and IGCs aren’t showing much appetite for making the defaults they have charge of “accountable”. But that is likely to change as the DWP press for better reporting on the fund’s footprint and the FCA assess the IGCs for their work driving out value for money.
Maybe we can move towards a better word for “default”. I think the “standard” fund is fine (it suggests that someone with standards put it in place though I fear it would fall foul of insurers except Standard Life).
My suggestion is that we rename default funds ‘house funds”, so that there is a clear link between the fund , the platform and the pension provider. House funds suggest a higher degree of accountability and the associations with food and drink are pleasant. For those in the industry , house funds also align with “house views” and house views are what we’re supposed to value for our money.