The Stakeholder Pension Lottery: An Analysis of the Default Funds in UK Stakeholder Pension Schemes
26 Pages Posted: 28 Jan 2005
Date Written: December 22, 2004
We analyse the range of default funds offered by UK stakeholder pension schemes, against the background of research that shows the majority of pension scheme members passively accept the default arrangements offered by the scheme sponsor. 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 have a significant effect on the distribution of retirement income outcomes. We also find a wide range of outcomes for each type of fund, and that with commonly observed contribution rates defined-contribution pension schemes appear unlikely to replicate the levels of retirement income produced by typical defined benefit schemes.
Keywords: pension schemes, defined contribution, default funds, strategic asset allocation, lifestyle profile, stochastic simulation
JEL Classification: G11, G23
Suggested Citation: Suggested Citation