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Smart defaults: Determining the number of default funds in a pension scheme

Blake, D. ORCID: 0000-0002-2453-2090, Duffield, M., Tonks, I. , Haig, A., Blower, D. & MacPhee, L. (2021). Smart defaults: Determining the number of default funds in a pension scheme. The British Accounting Review, 101042. doi: 10.1016/j.bar.2021.101042

Abstract

We propose a new methodology for the smart design of the default investment fund(s) in occupational defined contribution pension schemes based on the observable characteristics of scheme members. Using a unique dataset of member risk attitudes and characteristics from a survey of a large UK pension scheme, we apply factor analysis to identify single factors for risk aversion, risk capacity and ethical investment preferences, and then apply cluster analysis to these factors to identify two distinct groups of members across age cohorts. We find membership of these clusters depends on a number of personal characteristics, with the principal differentiating feature being that one group had previously engaged with the pension scheme, while the other had not. These identified characteristics can be utilised in the design of smart default funds, including appropriate engagement strategies.

Publication Type: Article
Additional Information: © 2021 The Authors. Published by Elsevier Ltd on behalf of British Accounting Association. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
Publisher Keywords: defined contribution pension schemes, investment choices, default investment funds, cluster analysis, risk attitude, risk capacity.
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
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