Five questions to consider when choosing a default pension investment option

Choosing a pension default isn’t just a tick-box - it shapes retirements. Here's what to think about before making your decision.

One of the most important decisions an employer will make when setting up or reviewing a workplace pension scheme is choosing a default investment option. And with 90% of employees choosing to stay invested in the chosen default, it’s even more important to get it right.

So here are five questions to help you make your choice with confidence.

1. Does it suit the needs of the workforce and what choices are available?

The default will need to suit the needs of a wide range of people, so it can be useful to dig a little deeper into the profile of your workforce to find out if there are some common factors that will influence your decision. Things like average age, views on sustainability, and even religious beliefs can all influence what you might be looking for in a default option.

Still, everyone’s different. And although you’ll do your best to pick a default option that will suit the majority of your employees, it won’t be right for everyone - which is why choice matters. It's important to make sure other suitable investment options are available, so your employees can choose what works best for them.

At Royal London, our default investment options offer things employees may typically look for in an investment option - including a strong track record of performance and a clear approach to responsible investment. But, if your employees wish to do their own thing, they’ll also have access to alternative lifestyle options and ready-made portfolios, as well as full fund range.

2. How does it balance risk and returns?

When it comes to investing for retirement, long-term growth is the goal. But, as with all investing, that comes with a degree of risk, which means the value of the investment can always go down as well as up.

A good default option needs to find the balance between delivering strong returns for employees over time and managing investment risk – particularly as they get closer to retirement.

This is why our defaults and wider lifestyle investment options, lifestyle strategies, can prove to be popular. They start with higher-risk investments and move towards lower-risk investments as the employee gets closer to retirement.

3. What does it cost?

No matter how well an investment performs, high charges can eat into returns over time - especially when investing over a number of decades.

The charge cap for defaults used for auto-enrolment is currently 0.75%, but many providers can offer options below that threshold. Be sure to shop around and find an option that gives you and your employees value for money.

4. How is it governed?

The decisions don’t stop at choosing the default. Employers and their advisers have a responsibility to monitor the default option over time to check that it still suits the needs of their employees. This can include reviewing its performance and making sure it’s still meeting its objectives.

Your pension provider may have a team of experts who will do a lot of this on your behalf. Still, it’s important to understand who is making the decisions about the default, how they make those decisions, and how any changes are communicated to your employees. Which brings us to our last question…

5. How is information communicated?

Pensions and investments can be complicated topics, so it’s important employees are well informed so they can make the right choices for their future. Make sure your pension provider’s communications are clear, jargon-free and engaging. And if they offer additional educational support like webinars, guides or digital tools - even better.

For example, our pension webinars are filled with useful information that can help your employees get to grips with the basics and feel more prepared for their future. To find out more or register for our next one, visit our website.

Choose a default option with confidence

Choosing a default isn’t about ticking a box - it’s about setting your employees up for success. That’s why our default options are designed to give you confidence that you’re meeting both your obligations as an employer and the needs of your employees.

Our defaults are looked after by a team of experts whose job it is to make sure that they meet their objectives, and who will put better retirement outcomes for your employees at the heart of their decision-making.

Plus, our range of default options is designed with the needs of employers in mind. So you can enjoy flexibility of choice, reliable governance, and solutions that are in line with regulatory guidance.

Want to know more?

You can find out more about our default investment options on our website.

If you’re new to Royal London or would just like some more information about our default range, simply get in touch.