11th November 2015
Workers who are automatically enrolled into the worst performing pension funds could lose out to the tune of £500,000 over a lifetime.
Research from JLT Employee Benefits has found that the performance of the top ten defined contribution (DC) default funds has ranged from circa 3.5% to 9.5% per annum over the last three years.
This means that employees who have been auto-enrolled into the lowest performing funds have been losing out on 6% return per year compared to those in the best performing funds.
The research also uncovered big differences in volatility levels between the top ten default funds, with numbers ranging from circa 5.3% to 11.3%.
According to JLT Employee Benefits, this underlines the importance for companies to choose the best default strategy, as well as the best provider, for their employees when setting up a DC pension scheme, and then to monitor performance of their default fund.
Maria Nazarova-Doyle, head of DC investment consulting at JLT Employee Benefits, says: “Losing out on a 6% return per year could have a huge, irreversible repercussion on members’ financial position at retirement. For example, a person in their thirties saving 8% of their £30,000 p.a. salary in a DC pension could end up with c. £185,000 at retirement instead of c. £715,000. This can dramatically change a pensioner’s life-style.
“While there may be a very good reason why a certain provider/default strategy is selected, it is paramount that this decision is reviewed regularly in light of the default’s risk adjusted performance, as well as changes in regulations, scheme demographics and wider investment universe.
“Much ink has been spilled as people fret about investment fees, but the problem we are highlighting is many times more serious. Considerations of whether fees should be capped at 0.75% or 0.50% pale into insignificance when faced with such a huge difference in performance between providers. In our previous example, had the fees been capped at 0.50% for the same strategies, the difference of 0.25% p.a. would only equate to c. £35,000 overall, which does not even begin to compare with the difference that is driven by potential returns. Therefore, the focus should be not on fees but on the investment quality of default strategies.”