In life, choice is generally considered a good thing. But, when it comes to the auto enrolment market, offering investment choice can end up adding no value and driving up cost for members.
Auto enrolled savers are, by their very nature, passive. They haven’t elected to join a pension scheme; their employer has enrolled them. They haven’t chosen the pension scheme their money will be paid into; their employer has decided. And, in most cases, they haven’t decided how much to pay in; the government has decided that.
As a result, it’s probably unsurprising that over 99% of savers who’ve been auto enrolled into a scheme that does offer a range of funds don’t make any active decision and remain in the provider’s default fund.
Those savers who do self-select are normally guided by the risk classifications of the funds available. However, regardless of the tools at their disposal, members continue to struggle to determine their own attitude to risk.
Those that do self-select rarely revisit their investment decision. Research shows that c. 80% of self-select members change their investment selection less than once every five years, and more than half of them never make a change to their initial investment selection. An initial choice of a cash fund, can remain in place for 40 years or more and lead to significantly lower retirement fund values.
The few members who do switch their investment funds will often chase the market. The buy high/sell low behaviour of even the most experienced investors continues to be well documented.
As a result, the vast majority of savers are better served by the default fund than by making their own investment decisions.
With fund sizes for auto enrolled savers still very small, it’s perhaps unsurprising that they aren’t paying too much attention to how their money is invested.
In the NOW: Pensions Trust, the average fund size is around £400 with members on average paying in just £35 per month.
Evidence suggests that savers don’t really begin to engage with their pension savings until they have the equivalent of one year’s salary saved. For our members, this could take a decade.
The message is clear – auto enrolled savers don’t want to be burdened with investment choice and we don’t think offering investment choice in this market is the right approach.
With an uninterrupted focus on a single investment solution, we can ensure a strong approach to investment governance, allowing members to concentrate on the things they can influence – fundamentally when they plan to retire, what they plan to do when they do retire, and how much they should be saving to turn their dreams into a reality.
Rob Booth, Director of Investment & Product Development, NOW: Pensions