Nest's video gives an indication of how to carry out due diligence on default funds to ensure there is appropriate diversification.
According to Andy Beswick, managing director of business solutions for Aviva, diversification will vary between provider defaults but almost all will have allocations to equities (developed and emerging) and bonds (government and corporate).
He says: "Some [default funds] will access a broader set of asset classes, including high yield bonds, property and alternative asset classes.
"However, cost, and the cost of accessing the various asset classes, will play a significant role in determining the extent of diversification within a default. It’s worth remembering that typically only larger employers will ask advisers to create bespoke default funds for them.
"Most businesses, especially in the small to medium-sized market will use a default fund created by their pension provider."
Volatility and risk
"We believe taking investment risk is usually rewarded in the long-term but volatility in and of itself is not a good thing", says Mark Fawcett, chief investment officer for NEST.
This is why he advocates: "Smart risk management, true diversification and ongoing monitoring and oversight are likely to provide smoother long-term returns that build trust and limit the drag effect of excess volatility."
"Most members will look at returns and little else", comments Graham Peacock, managing director of the Salvus Master Trust.
"People bandy around 'lifestyle', 'target' and 'date' and 'de-risking' terms but good, solid returns, in a controlled risk environment is what most members want."
He adds: "Diversification for the sake of it is not a good thing, as it can dilute investment returns, but if a lack of diversification misses out on investment opportunities or increases risk, then not having enough diversification is wrong."
For this reason, he says getting the right level of risk and return is what a provider should focus on, by looking at modern portfolio construction theory, and allowing the manager to adapt it to changing market conditions where necessary.
Segmentation
The automatic nature of such workplace pensions means the due diligence around scheme and fund selection has to be "spot-on", says Andy Agathangelou, founding chairman of the Transparency Task Force.
He says this is important because there is "typically zero" input from the ultimate client when it comes to fund choice.
He explains: "The member is absolutely reliant on the decision of others, so duty of care must be paramount."
Yet according to Sackers' Ms Baker, it is tricky to assess whether a default fund is appropriate for a particular workforce.
This is especially in the context of the "new world of pension freedoms", and because of this complexity, she says there has been an increase in the use of multiple default funds.
