Scottish Life backs call for Pension Schemes to take more responsibility for DC investment strategy

Scottish Life, the pension specialist arm of the Royal London Group, has welcomed the recent report from the Pension Institute on defined contribution pensions investment.

Dealing with the reluctant investor: Innovation and governance in DC pension investment’ published in April 2007) focused primarily on governance in three areas:

Default funds
Investment choice
Communication issues

One of the key findings of the report was that 69% of pension professionals surveyed thought that typical investment arrangements in UK DC pension schemes fall short of most members' needs.

This confirms previous analysis by Scottish Life which identified that a properly governed default fund, with appropriate investment choice and clear communication for members, were key ingredients that are often missing in private sector pension schemes. In response to this analysis, Scottish Life launched “Managed Strategies” in September 2004 -- a range of nine benchmark asset allocation strategies, designed to maximise the prospective real return over a specified time horizon and subject to a specified level of risk.

Alasdair Buchanan, Scottish Life’s Head of Communications, commented: “We’re not surprised that the Pension Institute’s report has highlighted the problem of many default funds not being fit for purpose. This is very important as it helps clarify many of the key issues affecting members of DC pension arrangements as well as addressing how providers can improve current provision.

“The reality is that many members put their trust in the default investment strategy, and rely on it to be appropriate throughout their lifetime. The report suggests that many traditional funds fail to adequately match members’ needs. It also indicated that the Pensions Regulator is alert to some of these issues for both contract and trust based DC arrangements. Given the number of people invested in default funds, perhaps the biggest surprise is that it is only now receiving this degree of scrutiny.”

According to the report, the NAPF Annual Survey 2006 shows that typically over 90% of scheme members opt for the default fund. The main reason for this is that individuals often lack the full knowledge or confidence to make appropriate investment choices. The Pensions Institute warns that it is paramount that scheme members receive clear communications and that providers ensure there is a transparent governance process.

Nick Leitch, Investment Marketing Manager at Scottish Life, added: “Our own research and analysis highlighted the need for properly governed default funds with clear investment choice. These are just two of the reasons for Scottish Life having developed ‘Managed Strategies’, which offers risk-based asset allocations, reflecting a scheme member’s own circumstances. Individuals can choose the fund that fits their attitude to risk -- adventurous, balanced or cautious.

“In addition to this, the key elements of Managed Strategies are subject to regular reviews by the Investment Advisory Committee to help ensure that they continue to meet the needs of scheme members as economic and other circumstances change. This governance process offers advisers and their clients a considerable degree of comfort, as these reviews are intended to keep the Managed Strategies funds on track. Performance, as we know, can go down as well as up, and while we can't control market fluctuations, we can monitor whether more (or less) risk is being taken than the adviser or their client was expecting, and we can take action if appropriate.”