Setting up an effective default fund investment strategy will be a crucial step in ensuring auto-enrolment works for everyone, the Investment Management Association (IMA) says.
Speaking at the Westminister and City conference on personal accounts and auto-enrolment, IMA chief executive Richard Saunders says 80% to 90% of people auto-enrolled into personal accounts will fall into the default fund.
"How their money is invested will be crucial," he says. "It will need to make sure adequate returns are delivered over the working lifetime of the holder, while avoiding excessive exposure to market risk at the point of retirement."
Saunders adds it was not just a personal accounts issue, but one which applied across DC schemes in general and will become "increasingly important".
"There are several approaches that have been advocated but as yet no clear consensus on the way forward. We are going to see a broader industry discussion on this, for which I hope the forthcoming consultation on investment issues by the Personal Accounts Delivery Authority will prove a catalyst," he added.
Saunders also says as DC becomes the standard for pensions across the country the important of investor education will continue to grow.
"In a world of DC and personal accounts, investors will need to understand the new sorts of risks they will bear and that, while risk can never be eliminated, it can be managed.
"They will need to understand the consequences both of excessive risk taking and of excessive caution. They also need to be aware of the implications of not saving enough money.
"A major challenge for the industry in future is to educate investors about the potential risks before they arise so they can make well-informed decisions throughout."IFAonline
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