The quality of the provider’s default fund investment proposition is seen as the most important factor for EBCs and advisers when recommending workplace pension providers to their clients. The data shows investment proposition is now even more important than charges and efficiency of administration. Even allowing for a margin of error, the fact that the investment strategy of the default fund now ranks on a par with charges in terms of importance when recommending providers marks a significant change in the way intermediaries are evaluating workplace pension providers.
Since the rollout of auto-enrolment, which started in 2012, energy has been focused on operational and administrative matters, ensuring the smooth enrolment of millions of new savers into schemes through the establishment of efficient integration with employers’ payroll systems.
For the last six years the main questions for employers thinking about their workplace pension have been ‘does it get the job done?’, ‘will it go wrong?’ and ‘which solution is easiest for payroll and HR?’.
Now that task is completed, focus is moving from the operational towards how the fund actually performs, how it is governed and how employees will interact with it.
This development marks a new phase for workplace pension providers. Several providers say they are planning to revamp their default investment proposition, or have recently done so, and we can expect more innovation and the use of a wider range of asset classes as defaults achieve greater scale.
While consultants and advisers now say investment proposition is of a similar level of importance to cost, it remains to be seen whether this will be translated through into recommendations that employers pay more for default propositions that are perceived as ‘better’. Providers report failing to win schemes on the basis of a difference in charges of one or two basis points. However, with increased scrutiny of performance of pension default funds revealing significant differences in the risk and returns of default funds – such as the Corporate Adviser Master Trust Defaults Report, which identified a 30 per cent difference in the performance of the best- and worst- performing master trusts over the three years to 31.3.18 – intermediaries may start to shift their focus away from cost. Increased interest from intermediaries of defaults that introduce more expensive alternative illiquid asset classes into their strategy may further diminish the historic prioritisation of low charges.
Quality of governance, keenness of charges, the extent to which the scheme is easy for users to engage with and standard of administration remain significant factors. The quality of the provider’s at-retirement proposition is also seen as important, reflecting the impact of pension freedoms and the likelihood that many scheme members are likely to take benefits from the accumulation provider.
The research data shows that consultants and advisers do not see a provider’s ability to offer a full suite of pension products through a single platform as a big factor in provider selection, with just 7 per cent citing the ability to offer Isa and GIA in their top four most important criteria for a workplace pension provider. Nor is a wide choice of fund alternatives to the default seen as a top priority, emphasising advisers’ focus on the default as the dominant vehicle for the overwhelming majority of members, and confirming the trend away from helping members to self-select into a portfolio more suitable to their needs.
Despite considerable media and political focus on responsible investment and environmental, social and governance (ESG) factors, no advisers cited ESG screening as a top priority for provider selection.