Adviser > News > June 2011 > DWP issue default fund guidance
DWP issue default fund guidance
The DWP set out what default funds should look like under the post automatic enrolment regime.
In their May 2011 paper ‘Guidance for offering a default option for defined contribution automatic enrolment schemes’ the DWP has set out what default funds should look like under the post 2012 automatic enrolment (AE) regime.
Why is the guidance required?
One condition of an AE scheme used to satisfy the employer duties is that members must not be made to choose their investment funds.
As such, a default fund must be made available. The DWP are concerned that default funds must be a “...sound and suitable investment savings vehicle for individuals.”
The DWP feels that “...setting out good practice in guidance is the best method to promote successful default options and achieve good member outcomes.”
However there is a warning that if this guidance does not meet its stated aims, the DWP may issue regulations to ensure compliance.
Scope
The guidance covers both contract and trust based defined contribution schemes. As we expect the majority of schemes set up under AE to be contract based (e.g. Group Personal Pensions), we won’t cover trust based schemes here.
The guidance
This is split into four parts - governance, design, review and communication.
1. Governance
The DWP recognises that various aspects of the default fund’s governance may be undertaken by different people, such as the provider, adviser or employer. It does not go as far to say who should be doing what, but does say that roles and responsibilities should be clearly allocated accordingly.
The roles and responsibilities of each of the designated parties should be defined clearly and completely in writing, should be made available to members on request and should be updated as and when required.
2. Designing the default option
The overriding feature of the default fund should be that it reflects the likely membership profile. The DWP further sets out the standards which it expects to be followed:
- Fund objective
The aims of the fund, the strategy used to achieve the aims, how risk will be managed and expected member outcomes.
- Suitability
The default fund’s investment strategy and asset allocation should reflect the likely investor, as far as possible.
- Affordability
The default fund should be appropriately and competitively priced for active and deferred members. Charges should not be excessive in relation to the services being provided. A breakdown of all the charges – including adviser/consultancy charges - should be disclosed to the members and should reflect their needs. And the effect of the charges on member outcomes should be made clear.
- Managing risk
The default fund should reflect the retirement profile of the members, balance risk and growth appropriate to the fund’s objectives and allocate a diversification of assets accordingly.
3. Reviewing the default option
The default option design, performance and suitability of the fund and its investment strategy should be reviewed at least one every 3 years.
In addition, ad-hoc reviews of the default fund may be appropriate where there is, for example:
- a change in the charging structure
- significant under/over performance of the underlying funds
- significant changes in the employer and or/employee demographic
Any review should take account of, for example:
- ongoing suitability of the default fund
- suitability of charging levels
- investment strategy
- whether performance of underlying funds continues to reflect the fund’s objectives
When a review is undertaken, this must be documented and any changes must be communicated to members and reasons given where any suggested changes are not made.
4. Communicating the default option
Initial communications to members should include:
- a description of the default option
- a statement of the fund’s objectives and risk profile
- disclosure of charges
- where to get more information.
Information should also be made available on request by members, including:
- how objectives will be achieved
- the investment strategy aims and risk management strategy
What it all means
From 2012, every employer will be required to have a pension scheme in place. Every one of those schemes will have a default option available.
Providers and advisers will have to design those default funds in line with the DWP guidance.
Our Governed Range fits the bill
We built our Governed Range investment proposition more than two years ago with governance firmly in mind. We believe it ticks all the DWP’s boxes for AE default funds. Read more about our Governed Range.
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