New report suggests too much DC pensions choice

Thursday, 06 December 2007 17:59

Savers in Defined Contribution (DC) pensions could be put off making key investment decisions if they are faced with too wide a range of choices, according to a report published by Edinburgh-based financial risk consultants, Barrie & Hibbert.

The new paper, "Managing investment choice in DC pension schemes", identifies research suggesting participation rates in DC pensions actually decline where savers are offered more choice. In schemes with 2 fund options, average take-up rates are 75%, compared with only 65% in schemes with 40 fund choices.

The report also notes that, according to the National Association of Pension Funds, 94% of DC savers currently opt for the default fund nominated by their scheme provider, even though 44% of schemes offer more than ten choices. Evidence drawn from the Swedish pensions system points to a similar conclusion: with a range of over 600 funds for members to choose from, over 90% use the default option.

Head of Retail Financial Planning at Barrie & Hibbert, Philip Mowbray, said:

"These findings have important implications not only for existing pension savers, but also for the millions of people brought into DC pensions under the Government's proposed Personal Savings Accounts. The evidence gathered in this paper suggests providers should offer members a fairly narrow range of options, but take care to ensure that the funds themselves are well diversified.

"Of course, more sophisticated savers should have access to a wider range of funds, but it may make sense to implement some kind of filter so that the majority of members can choose from a simple range of funds covering most needs."

Today's paper, the latest in a series of behavioural economics papers from Barrie & Hibbert, also highlights studies carried out in the United States which show that where scheme members are offered five choices, they tend to divide contributions between all five. Where the range is much larger, however, members tend to limit their choices to between three and five funds - possibly reflecting the number of choices on one page of the election form.

Attachments:
Defined Contribution Pension Saving.pdf [Read more] 198Kb