Monday, 3 September 2007

Default decisions...

Just a quickie on this story from Tory-supporting fund manager Fidelity. They reckon members of DC schemes who opt for the default investment fund could be losing out on up to £3,600 a year. I've already seen this story run without question on a couple of pension websites, but it's worth bearing in mind a couple of things.

First, the calculations are based on an individual putting away £300 a month into a DC scheme. I think that is pretty optimistic. For someone on an average full-time wage (about £25k) that must be about 15% of salary. No-one is going to put that much away on their own, and it's rare for even joint employer/employee contributions to reach that level. For example the NAPF reckons that average contribution rates to DC schemes in total are only 9%. To be putting away £300 as a 9% contribution you need to be on £40k, not £25k. So the optimistic assumptions on contribution rates inflate the possible impact.

Secondly, I'm really wary of these kinds of studies by fund managers as they only ever seem to be intended to encourage trustees to increase the range of fund choices open to members. Yet the White Paper on Personal Accounts quotes research suggesting that more fund choices confuse the punters and make them... er.... less likely to choose. The Swedish top-up pension scheme has hundreds of choices yet still 90% plus end up in the default.

Surely therefore what we should really be concentrating is not on offering more (and more expensive) fund options, but getting the design of the default fund right.

No comments: