Getting investment choices right for auto-enrolment schemes can be difficult, as there are many different factors to consider.
The first thing to bear in mind, according to Robin Armer, senior business development manager at NEST, is why investment is so important to the consumer.
He explains: "We are facing the first generation of savers who will rely almost entirely on their occupational defined contribution (DC) pensions to fund their retirement.
"Those DC schemes need to have investment strategies that are up to the challenge."
However, according to Glynn Jones, divisional director for group savings and investments for consultancy LEBC, the pensions freedom and choice regime, which came into effect in April 2015, has also muddied the waters.
Mr Jones explains: "The investment choice in pensions has become more difficult after pension freedoms, as there are three landing places: annuity, cash or drawdown.
"The employer must therefore decide both the correct risk profile of the investment funds within the auto-enrolment scheme he is setting up, and the landing place - which is beyond the knowledge an employer usually would have of the employees.
"Access to advice has, therefore, become way more important than before auto-enrolment. Default funds were supposed to make things simpler and more cost-effective."
Now, however, employers have to think well ahead to see how an underlying investment might perform for an employee depending on how that employee might, in 20 or 30 years' time, decide to take their pension entitlements.
Default
For now, most employers are relying on the provider's default funds to provide the right risk/return profile.
Helen Baker, partner for law firm Sackers, comments: "Investment choice is always important, particularly in relation to default funds as this is where most members' benefits will be invested."
She points to statistics from the Pension Policy Institute which revealed that 90 per cent of members are invested in their scheme's default funds. This increases to about 99 per cent for master trusts.
"Investment choices matter in terms of the ultimate outcome."
While some members may wish to choose their own fund, Mr Armer says research - both domestic and international - suggests most members will remain in the default fund.
To this end, he says: "In a world where there are no guaranteed outcomes, it is vital to assess how far a scheme's default investment approach can reduce uncertainty for members.
"People equate pension saving with the security and safety they need in old age, which runs counter to the idea their money could be 'at risk'."
Because of this, all default funds must have a good level of diversification, to smooth out the risk and volatility and encourage a wider range of assets to help the risk/return profile.
