Default Option for DC Schemes consultation: Sackers’ Response

Background

The DWP consultation on offering a default option for DC automatic enrolment pension schemes, published on 13 December 2010, seeks views on the design of default options in workplace personal pensions and occupational pensions used for automatic enrolment, looking at how they are offered, how they are reviewed, the governance arrangements and the communication of the default option, including ongoing communications.

In our view, the draft guidance provides a good overview of the standards required of default options for DC schemes which will be used by employers when the duty to enrol employees automatically into a workplace pension arrangement starts to apply from October 2012.

Design of the default fund

We recognise the importance of default funds, given the high proportion of individuals who are expected to invest in these arrangements. However, the draft guidance is equally relevant to the selection of other DC funds offered by auto-enrolment schemes. We therefore suggest that the scope of the guidance could be widened to encompass all funds offered by auto-enrolment vehicles.

In practice, depending on the type of scheme used by an employer for auto-enrolment purposes, there may be little scope for involvement in the design of the default fund. The focus will therefore fall on the governance aspects of such funds.

Governance

In terms of reviewing the default option, it would be helpful to have an indication as to what timescales are envisaged where the Consultation notes that the default option should “be monitored at regular intervals throughout the year”. It would also be helpful if the DWP’s expectations, in relation to the distinction between “reviewing” and “monitoring” default funds, could be clarified.

It may transpire, following a review of the default option, that it is no longer suitable for the target membership. We believe that trustees or employers finding themselves in this situation would welcome guidance on the extent to which they can make changes to their default fund, and what steps they should take in the event that they consider it necessary to close the fund and transfer members’ benefits elsewhere.

It would also be helpful to understand the consequences of non-compliance with the guidance. Is it the DWP’s intention that employers and others will be required to comply with the guidance or explain their reasons for not doing so?

Communications

A key aspect of communications in relation to members’ investment options (including the default option) is that they should be clear and easy to understand. The draft guidance makes reference to the Investment Governance Group’s DC Principles for Investment Governance. While these principles refer and contain links to the relevant guidance produced by TPR, it would be useful if the DWP’s guidance also listed these, for ease of reference.

Given TPR’s recent focus on governance, as well as publications from the DWP and the NEST ahead of the commencement of the auto-enrolment duty (such as the recently published NEST phrasebook), it would be advantageous for the terminology used to be consistent across the board.
As well as explaining the risk profile of the default option, it will be necessary to explain the risk profiles of other funds on offer, thereby showing the default fund in context.

It will also need to be made very clear to members that the default fund will work in a different way for each individual, depending on various factors, including their income, years until their proposed retirement date, contributions etc. This will be particularly important where the employer has had little or no input in the design of the default option, save for selecting it from their chosen provider’s range of available funds.
Where the guidance makes reference to switching funds, trustees and employers should be advised to make clear what costs will be associated with switching.

Communicating with members ahead of retirement is likely to be more challenging after the removal of the DRA from April 2011. This is likely to be a particular concern in the context of lifestyle funds (which to date many default funds have been) once there is no generally defined normal retirement date to aim at. While members are clearly responsible for their own retirement planning, communications in the years leading up to retirement will need to focus on this issue (and may need to be more frequent).

The guidance should make it very clear that for all communications, the duty of trustees and employers is to provide information, not to give financial advice.