The design of the default fund should be the most important focus for personal accounts, according to experts, as 94% of members in defined contribution schemes left their money in the default fund last year despite an increase in fund choices.
Figures from the National Association of Pensions Funds (NAPF) annual survey also reveal two-thirds of defined benefit (DB) schemes are still open to new members, although it points out many are changing their investment strategies to cope with the increased costs and risks associated with final salary schemes.
Following the introduction of the Pensions Regulator's scheme specific funding regime, the findings show 27% of DB schemes anticipate being fully-funded against new statutory targets within five years, while 84% expect to achieve this within the next decade.
The NAPF points out schemes are beginning to alter the investment strategies of the funds, with 18% increasing investments in property, while 8% moved more into hedge funds, and 7% increased their stakes in venture capital and private equity stocks.
At the same time, 31% of schemes increased their investment in fixed assets during 2006, although the NAPF says this often reflects the maturity of the scheme, while the proportion of pension fund assets invested in equities fell from 61.1% in 2005 to 59.5% in 2006.
Joanne Segars, chief executive of the NAPF, points out trustees face a difficult balancing act as they try to get the best possible returns for the risks they can responsibly take.
She says in many schemes trustees are turning to innovative solutions, as the findings show 17% of DB schemes have already adopted a liability driven investment (LDI) strategy, while another 30% admit the option is under consideration.
The NAPF also warns the results of the survey also highlight some challenges for the personal accounts system scheduled to come into effect in 2012, as it will essentially be a large DC scheme.
It reveals around 68% of DC schemes have ‘lifestyle’ default funds, which is expected to be the model adopted by personal accounts, although it warns 94% of members in one of these schemes leave their money in the default fund, while just 3% of members changed the way their money was invested over the last 12 months.
Just 23% of schemes offer a choice of more than 20 funds, while 54% provide a maximum of 10, albeit 23% of the 300 schemes surveyed admit the number of fund choices available have increased during 2006.
Segars says: “The amount of choice available in personal accounts will need careful consideration. There is every reason to expect most people to stay in the default fund so it will need to be very carefully designed by experts.”
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