When making recommendations on default funds offered by pension providers, the most important factor for advisers to consider is how each fund meets the client’s needs and goals. This is the case regardless of whether the client in question is an individual or a corporation.
As well as clients’ needs and objectives, it’s good practice to consider their aspirations and the timeframes in question. Advisers should bear in mind the profile of employees and company turnover, as well as the likely risk profile of the savers.
A key element of the decision-making process is to provide evidence that, as part of due diligence, advisers have analysed the scheme’s strengths and weaknesses:
- Does the scheme guarantee the acceptance of the employer and all its employees, regardless of the size of the employer’s company?
- If not, which groups of employees are excluded?
- Is the scheme’s default fund appropriate for the majority of the employer’s employees?
- Does the scheme offer alternative funds to its members, so workers don’t feel discriminated against, such as an ethical fund or Sharia option?
Checking the scheme’s credibility is important too. Is it a legitimate, officially recognised scheme? This can be done by checking with the Financial Conduct Authority and/or looking at The Pension Regulator’s (TPR) website.
- Does a trust-based scheme hold Master Trust assurance framework accreditation, preferably type 2, as this is considered more comprehensive?
In terms of investment management responsibilities, consider how the scheme invests members’ money.
- Are investment solutions sourced in-house and/or from third parties, and how does this affect the investment strategy?
- Does the strategy still match the client’s needs and that of their employees if it’s entirely outsourced?
- Are the working practices governing how investment decisions are made able to be evidenced and repeated?
- Do individuals involved in the decision-making process have the appropriate experience and qualifications to manage such decisions?
Thinking about the size of the fund:
- Are there enough assets under management to be able to diversify the fund effectively?
- If not, can it still operate in the client’s and saver’s best interests?
- Independent performance benchmarks:
- What measures have been taken to achieve current fund performance?
- Are the measures adopted independent, relevant and easy to follow?
- What actions are in place to address underperformance identified within the fund?
When evaluating value for money, advisers should assess:
- How the default fund compares to that of its competitors in each of the above areas relative to the scheme’s costs and charges.
Finally, when reaching a decision, it’s important to:
- explain why a particular fund was chosen
- update TPR periodically
- undertake triennial reviews
- organise ongoing scheme suitability assessments.
The above recommendations are based on the 2018 Defaqto report, which was commissioned by NEST. For more information, please see the full due diligence checklist on page 12 of the report.