An analysis of default funds in UK defined contribution pension plans

A. Byrne, D. Blake, A. Cairns, K. Dowd

Research output: Book/ReportOther report

Abstract

Most defined contribution (DC) pension plans give their members a degree of choice over the investment strategy for their contributions. Many plans also offer a 'default' fund for members unable or unwilling to choose their own investment strategy. We analyse the range of default funds offered by UK 'stakeholder' DC plans, which by law must offer a default fund. We find the default funds are typically risky, but also that they vary substantially across providers in their strategic asset allocation and in their use of lifecycle profiles that reduce investment risk as the planned retirement date approaches. We use a stochastic simulation model to demonstrate that the differences can have a significant effect on the distribution of potential pension outcomes experienced by plan members who adopt the default fund as the path of least resistance.
LanguageEnglish
Place of PublicationNottingham
Number of pages34
Publication statusPublished - 2006

Publication series

NameCRIS Discussion Paper Series
PublisherCRIS
No.8

Fingerprint

Defined contribution pension plan
Investment strategy
Pensions
Stochastic simulation
Defined contribution plan
Life cycle
Simulation model
Retirement
Stakeholders
Strategic asset allocation
Investment risk

Keywords

  • default funds
  • contribution pension plans
  • pensions
  • financial services
  • pension funds

Cite this

Byrne, A., Blake, D., Cairns, A., & Dowd, K. (2006). An analysis of default funds in UK defined contribution pension plans. (CRIS Discussion Paper Series; No. 8). Nottingham.
Byrne, A. ; Blake, D. ; Cairns, A. ; Dowd, K. / An analysis of default funds in UK defined contribution pension plans. Nottingham, 2006. 34 p. (CRIS Discussion Paper Series; 8).
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Byrne, A, Blake, D, Cairns, A & Dowd, K 2006, An analysis of default funds in UK defined contribution pension plans. CRIS Discussion Paper Series, no. 8, Nottingham.

An analysis of default funds in UK defined contribution pension plans. / Byrne, A.; Blake, D.; Cairns, A.; Dowd, K.

Nottingham, 2006. 34 p. (CRIS Discussion Paper Series; No. 8).

Research output: Book/ReportOther report

TY - BOOK

T1 - An analysis of default funds in UK defined contribution pension plans

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AU - Blake, D.

AU - Cairns, A.

AU - Dowd, K.

N1 - CRIS Discussion Paper Series – 2006.VIII

PY - 2006

Y1 - 2006

N2 - Most defined contribution (DC) pension plans give their members a degree of choice over the investment strategy for their contributions. Many plans also offer a 'default' fund for members unable or unwilling to choose their own investment strategy. We analyse the range of default funds offered by UK 'stakeholder' DC plans, which by law must offer a default fund. We find the default funds are typically risky, but also that they vary substantially across providers in their strategic asset allocation and in their use of lifecycle profiles that reduce investment risk as the planned retirement date approaches. We use a stochastic simulation model to demonstrate that the differences can have a significant effect on the distribution of potential pension outcomes experienced by plan members who adopt the default fund as the path of least resistance.

AB - Most defined contribution (DC) pension plans give their members a degree of choice over the investment strategy for their contributions. Many plans also offer a 'default' fund for members unable or unwilling to choose their own investment strategy. We analyse the range of default funds offered by UK 'stakeholder' DC plans, which by law must offer a default fund. We find the default funds are typically risky, but also that they vary substantially across providers in their strategic asset allocation and in their use of lifecycle profiles that reduce investment risk as the planned retirement date approaches. We use a stochastic simulation model to demonstrate that the differences can have a significant effect on the distribution of potential pension outcomes experienced by plan members who adopt the default fund as the path of least resistance.

KW - default funds

KW - contribution pension plans

KW - pensions

KW - financial services

KW - pension funds

UR - http://www.nottingham.ac.uk/business/cris/papers/2006-8.pdf

UR - http://www.nottingham.ac.uk/business/cris/discussionpapers.html

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Byrne A, Blake D, Cairns A, Dowd K. An analysis of default funds in UK defined contribution pension plans. Nottingham, 2006. 34 p. (CRIS Discussion Paper Series; 8).