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Default funds in U.K. defined-contribution plans

Byrne, A. and Blake, D. and Cairns, A. and Dowd, K. (2007) Default funds in U.K. defined-contribution plans. Financial Analysts Journal, 63 (4). pp. 40-51. ISSN 0015-198X

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Abstract

Most defined-contribution (DC) pension plans give members a degree of choice as to the investment strategy for their contributions. For members unable or unwilling to choose their own investment strategies, many plans also offer a default fund. This article analyzes the U.K. "stakeholder" DC plans, which must by law offer a default fund. The default funds are typically risky but vary substantially among the providers in their strategic asset allocation and in their use of life-cycle plans that reduce risk as planned retirement approaches. A stochastic simulation model demonstrates that the differences can have a significant effect on the distribution of potential pension outcomes.