Default Funds in UK Defined Contribution Pension Plans

37 Pages Posted: 10 Sep 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 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. We also analyse the fees charged for the default funds.

Keywords: defined contribution, default funds, asset allocation, lifecycle investing

JEL Classification: G11, G23

Suggested Citation

Byrne, Alistair and Dowd, Kevin and Blake, David P. and Cairns, Andrew J. G., Default Funds in UK Defined Contribution Pension Plans. Financial Analysts Journal, July/August 2007. Available at SSRN: https://ssrn.com/abstract=1012851

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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