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AE debate must now focus on how the money is invested

01 October 2013

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One year into the auto-enrolment project the focus should now shift to how the money will be invested, AllianceBernstein has said.

Over one million employees have been auto-enrolled and the majority of employees have declined to opt-out, which has exceeded the Government's expectations on participation.

However AllianceBernstein said that the quality of default strategies that dominate the market often falls short of the standards and outcomes that members should expect, and is therefore urging employers and trustees to think about which default strategies is actually best for members.

Tim Banks, managing director, pension strategies group at AllianceBernstein, said: "The heavy-lifting has been done. Low-opt out rates are widely seen as a success.

"But measuring the success of auto-enrolment is not simply about new UK savers joining defined contributions (DC) pension schemes - it's also about whether the default investment strategy will deliver the expected outcome for them."

He said that many DC schemes have been working on a 'set and forget' basis over the years, but there is a growing awareness that this approach will no longer stand up to the test of being the best for members.

Banks argued that traditional lifestyle funds have a rigid, mechanistic approach to asset allocation and are time-consuming and expensive to adapt, should conditions or regulations change.

The pensions market is increasingly turning to target date funds (TDFs) to improve the governance of DC default funds and to better fit scheme members' objectives as they offer a diversified investment approach that is actively managed, Banks said.

He added: "Industry estimates are that by 2018 an additional six to nine million savers will be saving in DC pension schemes, with an expected rise in the value of annual contributions of around £11 billion. We predict that by 2018, around half of the money flowing into these schemes' default approaches will be going into target date funds."

First published 01.10.2013