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DWP issues default fund guidance for DC auto-enrolment

The Department for Work and Pensions has issued non-regulatory guidance on offering a default fund for auto-enrolment defined contribution schemes.

At this stage the guidance, published today, is non-regulatory but DWP said it may consider issuing statutory instruments to uphold it and protect members’ interests if there is strong evidence to suggest it is is being wilfully ignored or if it is not having the desired effect of promoting good practice.

It said the principles-based guidance - intended to support existing legislation for both occupational schemes and workplace personal pension - should be met when governing, designing, reviewing and communicating the default option.

It added: "By this we mean it sets out high-level, non-regulatory principles to help establish good decision making when developing default options."

It is targeted at providers, advisers, employers, and trustees of DC schemes, fund managers and governance committees of auto-enrolment DC pension schemes.

The DWP will periodically review the guidance to ensure that it evolves and consistently reflects good practice. It added The Pensions Regulator also regularly reviews standards of governance and its findings will feed into DWP’s review process.

Confederation of British Industry senior pensions policy adviser Mario Lopez-Areu said: "With auto-enrolment coming in, it is crucial that employers are given sufficient flexibility to tailor their DC scheme to the needs of their workforce at an affordable cost.

"Over-prescriptive regulation and guidance from government and the regulator would only undermine flexibility, and lead to lower rates of saving. So, the government is right to use a light-touch, principle-based approach in its guidance."

The publication comes after the DWP published draft guidance on Offering a default option for defined contribution automatic enrolment pension schemes in December last year, to which it received 40 written responses.

The Investment Management Association said in its consultation response there was no single right answer to what makes a good defined contribution default fund strategy while AllianceBernstein warned against the "bear trap" of setting rigid rules to govern default funds.

In its own response to the consultation, the DWP said: "We need to allow pension products to evolve and therefore do not seek to be overly prescriptive; but we also want to make clear the behaviours we expect to see concerning default options which will protect individuals and support the pension reforms."

[Source: Professional Pensions”