Articles - Redefining the default fund...

...why personalisation needn’t be a paradox. As auto-enrolment (AE) reaches the furthest reaches of the population, the investment performance of schemes is increasingly coming under scrutiny. A recent survey by the Pensions Policy Institute found a staggering 99% of members of one particular scheme opted for the default. As things stand, default strategies are typically a one size fits all solution that clearly have not been calibrated to work for the masses.

 By Jinesh Patel, Vice President, DC Consulting at Redington
 A halfway house approach is necessary – where members get the benefits of a more ‘personalised’ strategy, but without having to choose for themselves. But is this possible?

 There are a number of ways to make this easier. First of all, offering a range of default choices could be an option. Each of these would need clear differentiators however.

 Such an approach would require innovative thinking. But the time has come for creative – even at times, extreme – solutions. One way of doing this could be to design the funds according to members’ personality types or investment goals. Scheme members would ideally complete an online personality test/goal based quiz. This would have two distinct streams: the first would indicate what their goals and investing personalities were; the second would make use of algorithms to ensure that these aligned well with their financial aspirations.

 Much thought would need to be given to the composition of these funds. It is no longer enough to simply group savers by their age, expected retirement date and the number of assets they have. Today’s workforce is less stable and far less hierarchical. There are growing numbers of twenty and thirty year olds who are working towards retirement in their early/late thirties for instance. Similarly, many in the 35-45 year old age group will not fancy their chances of retiring before the age of 70. Both these demographics will require a more nuanced strategy than the old truism of invest in higher risk products when younger and switch to lower risk ones as you get older. Equally, improved longevity and advancing healthcare means many will be able to work and live full lives well into their twilight years. These would facilitate more appropriate choices for members, and lead to better returns, but without the risk that they are simply switched off from making any decisions by inertia.

 Additionally, tapping into people’s interests and values is vital. ESG has been gaining momentum in recent years, with various man-made disasters hitting the headlines, such as the BP oil spill and survey after survey has demonstrated a growing appetite for investing in these funds, particularly among the millennial age group, but also across the board. At the same, social activism is increasing, the result of a combination of the spread of social media and the growing disquiet with ruling governments globally. Additional functionality could be built into algorithms to ensure that people are able to have their say on these matters, and vote with their feet if the fund they are invested in is not aligned to their values.

 Getting the right default strategy is essential for driving engagement. But so too is transparent decision-making, continuous communications with members and very comprehensive measures of performance that are meaningful to members should be used extensively.

 While a benchmark figure shows how a fund has performed in relation to others in that sector, members need to be able to see how their investments have performed in real terms as well as how they feed into their goals. If they are shown to be falling short, this very direct way of reporting could entice them to contribute more in order to reach these goals.

 At the start of this piece I asked whether it was possible to have a ‘personalised’ default fund. There is clearly scope to do this. What is key, however, is that both the technology we use and the solutions we come up with are guided by deep insights into the people who invest their hard earned money in them.

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