Quick answer
What is a default fund?
When you are enrolled in a workplace pension, your contributions need to be invested somewhere. If you do not make an active investment choice, they go into the scheme's default fund. The vast majority of workplace pension members are in the default fund, research suggests that around 90% of members never change from the default.
Workplace pension providers are required by law to have a default fund that is designed to be in the interests of members. The default must be reviewed regularly and must meet certain standards set by The Pensions Regulator.
How default funds are designed
Default funds are designed for the average member of the scheme, typically someone who will work until a standard retirement age and then access their pension in a standard way (historically, by buying an annuity). The fund aims to balance growth in the early years with capital protection as retirement approaches.
Most default funds use a lifestyling strategy, gradually shifting from growth assets (such as equities) to lower-risk assets (such as bonds and cash) as you approach your target retirement date. The speed and extent of this shift varies between providers.
Types of default fund
Target date funds are designed around a specific retirement year. The fund automatically adjusts its investment mix as the target date approaches, becoming more conservative over time. They are simple and require no active management from the member.
Governed portfolios are actively managed default funds where the investment strategy is regularly reviewed and adjusted by the provider or trustees. They may offer a more dynamic approach than a fixed lifestyling strategy.
Passive default funds track a market index rather than being actively managed. They are generally lower cost than actively managed funds and have become increasingly common as the default option for workplace pensions.
Steve's observation
The default fund is often better than people give it credit for. Modern workplace pension defaults are generally well-designed, low-cost and appropriate for most members. The problem is not usually that the default is bad, it is that members don't know what they are in or whether it suits their plans.
The most important thing is to understand what your default fund is designed to do. If it is designed around buying an annuity at 65 and you plan to take drawdown at 60, the lifestyling strategy may not be right for you. That is worth reviewing, but it doesn't mean the default is wrong for everyone.
Is the default fund right for you?
The default fund may not be the best choice if your circumstances differ significantly from the average member. Consider reviewing your fund if:
- You plan to retire significantly earlier or later than the scheme's assumed retirement age
- You plan to access your pension through drawdown rather than buying an annuity
- You have a strong preference for ethical or ESG investing
- You have a higher or lower tolerance for investment risk than the average member
- You are close to retirement and the lifestyling strategy has already shifted you to low-risk assets
Ethical and ESG options
Many workplace pension providers now offer ethical or ESG (environmental, social and governance) fund options. These funds consider factors beyond financial returns when making investment decisions, for example, avoiding companies involved in fossil fuels, weapons or tobacco, or actively seeking out companies with strong environmental or social credentials.
If ethical investing is important to you, check whether your provider offers ESG options and whether the default fund already incorporates ESG considerations. Many modern default funds now include some level of ESG integration.
How to change your fund
Most workplace pension schemes allow you to switch to a different fund at any time through the provider's online portal or app. You can usually switch your existing pot, your future contributions or both. Some schemes may have restrictions or charges for switching, so check the scheme rules before making changes.
Pause for thought
- Do you know which default fund your pension is in and what its investment strategy is?
- Does the default fund's assumed retirement age and retirement outcome match your plans?
- Have you considered whether an ethical or ESG fund option might be more aligned with your values?
- When did you last review your fund choice? Has anything changed in your circumstances since then?
Coaching point
Key terms
Frequently asked questions
What to do next
Find out which fund your pension is in and check whether it is appropriate for your circumstances and plans. If you are unsure, Guide 11 covers how to review your pension investments in more detail.
Guide 10 explains pension charges, what they are, how they affect your pot and what to look out for.