Millions of pension savers in the UK could be “sleepwalking” into inappropriate default pension arrangements as employees begin to be auto-enrolled in workplace schemes, according to Tim Banks, head of DC Sales and client relations at AllianceBernstein.
“While the new requirements are designed to help millions of Britons to save for their retirement, around 90% of new savers are “natural defaulters”, who will be automatically enrolled into a default pension fund because they do not have the time or inclination to make investment decisions. The default schemes currently dominating the market are not fit for purpose, and unable to cope with the modern workplace environment that many of these new savers find themselves facing today. If default funds don’t meet the savers, usually unspoken, expectations, many could be turned off pensions for good,” continued Mr Banks.
“The danger with existing default pension design is that the traditional “lifestyle” approach is too rigid. Such funds are a series of components, utilised to a pre-determined formula which cannot cope with fast-changing investment environments, evolving investment ideas or changes in regulation. Having to change a fund’s strategy or components to account for shifts in the investment landscape and individual savers’ income requirements can be complex and takes time, effort and cost.
“Furthermore, lifestyle formulas rely too much on a fixed retirement date – a single point in time that may be wrong many more times than it may be right. The temptation to be overly precise in a DC world ignores the fact that we are dealing with individual benefit outcomes. Much better to aim at a retirement window and be open to the different ways in which people will need to access their money.
“With 8 million new savers being auto-enrolled from October, this is a landmark catalyst to review new savers’ DC pension arrangements. It is vital that new approaches are introduced with appropriate strategies behind them to provide savers with a more flexible, dynamic and user-friendly means to save for their retirement.”