The Stakeholder Pension Lottery? An Analysis of the Default Funds in UK Stakeholder Pension Schemes

Most defined contribution (DC) pension schemes give their members a degree of choice over the investment strategy to be followed with their contributions. Many schemes also offer a ‘default’ fund for members who are unable or unwilling to choose their own investment strategy. Previous research shows that where a default fund exists, the majority of members adopt it as the path of least resistance, meaning the provider’s choice of default fund has the potential to have a significant effect on the welfare of the members. Given the importance of this decision by the pension scheme provider, we analyse the range of default funds offered by UK stakeholder pension schemes, which by law must offer a default fund. We find the default funds vary substantially in their strategic asset allocation and in their use of lifestyle profiles that switch the member’s assets to fixed-income investments as the planned retirement date approaches. We use a stochastic simulation model to demonstrate that the differences can have a significant effect on the likely distribution of pension outcomes.