Reducing consumer choices can greatly reduce anxiety, so argues psychologist Barry Schwartz in The Paradox of Choice.
In his case, American shoppers were the group in focus. However, more defined contribution (DC) pension schemes are also recognising that fewer choices could make for less anxious auto-enrolled savers.
How many choices are too few? How low can the number of alternatives go before it’s at odds both with the regulatory guidance and what clients’ workers need? Or is this less about the number and more about the variety a scheme’s fund range offers?
The consultation that informed how NEST designed its investment strategy considered these questions. So if we start from a place of ‘less is more’ what does good look like?
The regulatory guidance provides some clarity. The Pensions Regulator (TPR) says that in quality schemes both the number and risk level of choices should meet the needs of the membership.
Having a good understanding of both your clients’ workers and what’s being offered by a scheme will be key to recommending appropriate fund ranges. You may want to consider a number of factors. These include the total range of different risk profiles offered across the options. How far might a scheme be offering a number of funds that on closer inspection cluster around the same risk profile?
You may also need to consider how far different faiths and beliefs are reflected in the fund choices. A range that reflects diversity could reduce the risk of savers feeling they want to opt out because they don’t feel catered for.
A further consideration may be how far the fund options available are the legacy of existing schemes or have been tailor-made for auto-enrolment savers.
The majority of stakeholders who responded to the original investment consultation recommended keeping fund choices clear, simple and small in number.
They believed this would be the best way to help members make sensible decisions and would also be consistent with low charges. Stakeholders suggested offering different risk-graded funds to the default fund, an ethical fund and a religious-compliant fund, such as a Sharia fund.
These insights, plus strong behavioural evidence that having clearly differentiated and explained funds supports savers in avoiding naive choices, mean that today NEST offers five alternatives to our default.
Famous five
In addition to the NEST Retirement Date Funds we offer the NEST Ethical, Sharia, Higher Risk, Lower Growth and Pre-Retirement Funds. These five choices reflect the diversity of members’ needs without being overwhelming. Together with the NEST Retirement Date Funds, members have access to options that cover a broad risk spectrum and reflect diversity in terms of faith and beliefs.
Members are automatically enrolled into the NEST Retirement Date Fund that matches their state pension age. Around 99% of members stay in the single year target date fund for the year they’re expected to retire.
Choosing an alternative is straightforward but we don’t push fund choice. We are also keen not to create the impression that members need to engage with the alternative choices to get a good outcome. That said we know how important it is to empower our members. We want them to feel that being automatically enrolled into a scheme isn’t something ‘being done to them’, but something they are part of.
We’ve aimed to provide a clear choice framework where all the options are well-defined and meaningful. We think this sort of approach is one that advisers can be assured will meet the regulator’s expectations while also meeting the needs of clients and their workers.
Mark Fawcett is chief investment officer at NEST
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