UK - A survey has revealed that increasing numbers of corporate pension schemes now offer diversified growth funds (DGFs) in their defined contribution (DC) scheme fund range, as auto-enrolment puts the focus on the default option.

The number of FTSE100 companies offering DGFs in their DC schemes has risen sharply to 70 this year, up from 43 in 2011, according to annual research from consultancy Towers Watson.

Chris Smith
, senior investment consultant at the firm, said: “Getting the default investment option right has become critical for pension funds as more people are investing in them than ever before.”

“To achieve this many fiduciaries have segmented their memberships by individual risk profile, through a risk-assessment exercise, in order to tailor the default option, using DGFs where suitable,” he said.

Nearly all of the FTSE100 DC schemes - 92% - now operate a default investment strategy, up about 10 percentage points from last year, the survey showed. The vast majority of these default investment strategies were lifestyle strategies that include DGFs, it said.

More than half of the schemes had 90% or more of members invested in the default option, it added.

About a fifth of the companies have conducted risk assessment exercises to find a suitable default fund for most members, and one providing a clear audit trail, Towers Watson said.

Nearly 70% of companies already using auto-enrolment had over four-fifths of members in the default option, compared with about two-thirds of schemes where members have to apply to join.

Smith noted that qualifying auto-enrolment schemes are required to nominate a default investment option structured according to the Department for Work and Pensions’ guidelines and governed by Investment Governance Group (IGG) principles.

“These requirements are clearly having the intended effect of focusing governance resource on improving the default option, which is particularly important where auto-enrolment is the joining method,” he said.

However, a fifth of the DC schemes - mostly contract-based schemes - did not comply with the IGG principles at the moment, the research showed.

“While it is disappointing that contract-based schemes continue to play catch-up, the fact is that the significant majority of trust-based DC schemes now comply with the IGG principles,” Smith said.

This suggested employers and trustees had recognised that good governance was at the heart of a well-run scheme and important for achieving good member outcomes, he said.

In other news, the BBC has said it welcomes a recent High Court ruling finding it could impose a limit on pensionable pay in certain sections of its defined benefit pension scheme.

The UK public broadcaster said the court had found that it could, in principle, cap pensionable pay in the final salary and career average benefits 2006 sections of the BBC Pension Scheme, and that this could be done by counting only part of a pay increaseas pensionable pay.

The National Union of Journalists had previously claimed the judgement threw into doubt the public broadcaster’s ability to impose any cap.

A spokesman for the corporation said: “The BBC also welcomes the court’s recognition that the changes made - including the introduction of a new career average section of the BBC Pension Scheme and a new money purchase scheme- were options which it offered members to put BBC pension benefits on an affordable and sustainable basis in the future.”

The judgment came from Mr Justice Warren, who was ruling in a case on appeal from the Pensions Ombudsman, brought by John Bradbury, a musician in the BBC Philharmonic Orchestra and member of the Musicians’ Union (MU).

The original decision by the Pension Ombudsman had supported the BBC’s imposition of a 1% cap on pensionable pay. The court action was supported by the MU and the National Union of Journalists (NUJ).

But the judge also said it was still open to Bradbury to ask for a separate decision on whether the BBC acted in good faith in making the change.

This question had been raised too late in the process for him to make a ruling on it at the appeal, Warren said.

In the judgment, he said that if the parties could not agree on this issue, he would make a final ruling on it.