"Too much choice is not a good thing," says RisCura's Petri Greeff as he discusses the dangers of being spoilt for choice in defined contribution (DC) schemes.

Spoilt for choice. That's us. We all faced this challenge during this past festive season. Who bought a barista-in-a-box using those little coffee capsules as a gift and had to confront an array of choices whilst standing in a busy high street shop? Did you choose propriety capsules or the open standard ones? What brand did you choose? What model did you choose, the one with or without the milk frother? What flavor capsules did you choose, vanilla or chocolate or just plain coffee? Too many choices, too many decisions. The anxiety of making the right choice often paralyses us into making no choice at all.

Unfortunately this paralysis also often extends to our financial planning. Within the safety of old school defined benefit (DB) funds we didn't have to concern ourselves with the risk and consequences of making the wrong choice - that was the worry of the sponsor. Nowadays as auto- enrolment progresses and defined contribution (DC) funds are increasingly coming online in the UK, we are faced with real life-impacting choices. Choosing the wrong coffee machine might not be the end of the world, but making the wrong financial choice could very well have you "dining on a cold baked beans future" - if I paraphrase from Martin Lewis' talk at the National Association of Pension Funds (NAPF) Edinburgh conference.

Having worked in the South African pensions industry with mature DC funds, many of them coming to life in the early 1990s already, we have seen the danger of being spoilt for choice. The majority of DC schemes are trust-based and many have life stage arrangements where members pass through risk-profiled portfolios based on their age. In the few cases where DC schemes do offer member choice between three or four risk-profiled portfolios we have seen young members choosing to be in the lowest risk cash portfolio because somebody told them that the market is 'too hot' and will come crashing down soon. Fast forward 10 years and they still sit in the lowest risk portfolio and failed to convert time into money, making a future meal of cold baked beans a reality.

I have also experienced this feeling of paralysis second-hand recently, when we arranged a stakeholder pension plan for our staff and had sight of all the different investment choices. I counted them: 105 spread over all types of asset classes, sectors and regions. How can you expect a 25-year old to understand the difference between a Far Eastern fund and Japanese Equity fund, let alone expect them to make a choice of how much they want of each?

Too much choice is not a good thing. Who has heard of "voluntary simplicity" or "simple living" movements? I'm not proposing becoming an ascetic, but what I am proposing is that trustees of DC schemes, those who provide the choices, have a moral responsibility to provide more guidance in assisting making the most appropriate choice. And the members, those making the choice, have a responsibility to themselves to spend more time looking at fewer choices. In the longer term less is more.

Written by Petri Greeff, director, RisCura

pgreeff@uk.riscura.com