UK - The default fund in workplace personal pensions (WPP) will need to carry charges below the current stakeholder pension level if they are to qualify for auto-enrolment, according to draft guidance published today by the UK government.

A consultation issued by the Department for Work and Pensions (DWP) sets out proposed guidelines for "operators" of WPPs, including group personal pensions (GPPs) and stakeholder pensions, on the design of the default fund.

It said individuals cannot make an active investment choice at the stage of auto-enrolment so "default options will play a vital role in the post-2012 world", and the guidance aims to set "minimum standards across default options used in WPPs".

The document sets out several key areas for operators to follow when developing the default:

Objective - high level objective outlining what the fund aims to do and its strategy; Suitability - Operators should liaise with employers to ensure it is suitable for the majority of members in investment strategy and assets; Affordability - Total charges should be below the stakeholder price cap (1.5% for the first 10 years and 1% thereafter); De-risking mechanism should take into account risk profile, and could include lifestyling or DC banking, and Asset allocation - diversified portfolio but holdings in the company of the sponsoring employer should be capped at 5% of the fund.

The consultation also highlighted the need for good communication and clearly targeted options for the employer to choose. It also proposed the governance of the default option, including regular reviews of fund management, performance, charges and suitability, would be the responsibility of the operator.

The issue of group self-invested personal pensions (GSIPPS) is also tackled in the consultation, with the government outlining that workers can only be auto-enrolled into the default fund of a GSIPP and this must "resemble" and be priced at comparable levels to GPPs.

Although members can have access to other retailed pooled funds once they have been automatically enrolled, these should also have "comparable charging levels" to a typical GPP to ensure members are "not paying for features which they do not need and/or use".

Rachel Vahey, head of pensions development at Aegon UK, said: "We were looking for non-prescriptive guidance which sets out high-level principles for default funds; good guidance shouldn't stifle innovation. This type of guidance should allow providers to design default funds, which meet the risk appetite and needs of their customers."

She pointed out default funds will come in many different shapes and sizes as existing schemes and their employers and advisers will have different ideas about what might be successful in practice.

"The guidance needs to reflect this flexibility and cannot be too rigid in any area - including charges. We need to focus on developing the right outcomes for people, and not be defined by percentages, processes and procedures," said Vahey.

John Lawson, head of pensions policy at Standard Life, added this is a new proposal from the government as "they are effectively applying the stakeholder cap to all types of pension scheme, but only in respect of the default fund".

However he said non-default funds can have charges above 1.5%, and revealed "1.5%/1% isn't an issue for us - most of our schemes' default option are priced between 0.25% and 0.7%, with the maximum at 1%". 

The consultation will close to responses on 17 December 2009.



If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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