Defined contribution (DC) default funds are reviewing and overhauling their design and governance to deliver good retirement outcomes for members, the National Association of Pension Funds (NAPF) has said.

Research published in the Default Fund Design and Governance in DC Pensions report focuses on eight DC schemes that have created, reviewed and improved their default funds, and highlights 15 default fund design trends.

The default fund design trends include a strong focus on driving value for money over lowest cost; stripping out investment volatility from the default; and the white-labelling of funds so that changes can easily be made in future.

NAPF head of research and strategic policy Mel Duffield said: "It is encouraging to see NAPF members leading the way in building the new generation of DC default funds over the past few years.

"Auto-enrolment is bringing in different types of scheme members, many of whom will be saving in a pension for the first time and will want protection from volatility in their investments. We are pleased to see so many employers and trustees rising to this challenge and managing to get a good, comprehensive deal for members on charges while keeping their investment risk down."

The report offers 15 practical tips on how to approach default fund design, which include warnings that the process can take longer than expected, with the average period being two years; that investment consultants and suppliers should be challenged to deliver against employers' and trustees' expectations; and that the design should be flexible enough to allow additional new features and investments in future.

Default funds in DC schemes are increasingly important as they are a requirement for all auto-enrolment schemes, the NAPF said, and 84% of savers today find themselves within the default where the investment has been designed for them.

The NAPF's Pension Quality Mark (PQM) is looking into raising standards around the governance of default funds by setting new minimum standards in 2014.

First published 10.09.2013

monique_simpson@wilmington.co.uk