Default Funds in U.K. Defined-Contribution Plans

Posted: 25 Jul 2007

See all articles by Alistair Byrne

Alistair Byrne

University of Edinburgh - Business School

Kevin Dowd

Nottingham University Business School (NUBS)

David P. Blake

City University London - Cass Business School

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics

Abstract

Most defined-contribution (DC) pension plans give members a degree of choice as to the investment strategy for their contributions. For members unable or unwilling to choose their own investment strategies, many plans also offer a default fund. This article analyzes the U.K. "stakeholder" DC plans, which must by law offer a default fund. The default funds are typically risky but vary substantially among the providers in their strategic asset allocation and in their use of life-cycle plans that reduce risk as planned retirement approaches. A stochastic simulation model demonstrates that the differences can have a significant effect on the distribution of potential pension outcomes.

Keywords: Private Wealth Management, Asset Allocation, Portfolio Management, Other

Suggested Citation

Byrne, Alistair and Dowd, Kevin and Blake, David P. and Cairns, Andrew J. G., Default Funds in U.K. Defined-Contribution Plans. Financial Analysts Journal, Vol. 63, No. 4, pp. 40-51, July/August 2007. Available at SSRN: https://ssrn.com/abstract=1002979

Alistair Byrne (Contact Author)

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom

Kevin Dowd

Nottingham University Business School (NUBS) ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

David P. Blake

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain
+44 (0) 20-7040-5143 (Phone)
+44 (0) 20-7040-8881 (Fax)

Andrew J. G. Cairns

Heriot-Watt University - Department of Actuarial Science & Statistics ( email )

Edinburgh, Scotland EH14 4AS
United Kingdom

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