UK - Less than a third of defined contribution (DC) scheme members understand how cash, equity and bond funds work, a Mercer Investment Consulting survey has found.
The survey of 670 DC scheme members from around 550 companies found that only 33% understand the principle of cash funds, while just 25% and 26% respectively understand how equity and bond funds work.
Around two-thirds (64%) of respondents believed they had a reasonably good knowledge of how their pension built in value over time, but 80% were unsure of what an annuity was.
“Many employees in defined contribution pension schemes have limited knowledge of investment funds," said Patrick Race, principal at Mercer Investment Consulting.
"As the information is so complex a lot of people will struggle to understand the difference between funds, much less choose which ones to invest in. Funds offering different levels of risk, with jargon-free names, go a long way to help scheme members make the difficult decisions they now face.”
The survey found that 38% would only want their money invested with a fund manager they had heard of.
Ashish Kapur, associate at Mercer Investment Consulting, commented: “Most investors do not attach much value to fund brand recognition, as they associate it with higher costs. Government proposals to introduce branded funds into personal accounts will not necessarily help members make more appropriate investment decisions.”
He added: “Despite warnings that past performance is no guide to the future, many DC scheme members still rely heavily on performance statistics when deciding which funds to invest in.
More forward-looking information based on relevant and objective criteria needs to be made available to members to prevent what can often be a vicious circle of chasing investment returns.”
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