Workplace pension schemes in which eight million people are auto-enrolled are invested in defined contribution default funds which fail to meet regulatory standards.
Research from consultants Cardano, which covered most leading pension funds in the sector, shows 38 per cent of the 29 funds analysed did not have clear fund objectives, despite regulatory guidance that this should be transparent.
No specific fund names were identified in the research as failing.
The research covered master trusts (multi-employer arrangements with a shared provider) and contract-based arrangements (typically a policy by an insurance company) and some investment-only propositions.
These default products are used by the vast majority of savers who are auto-enrolled when they omit to select a particular fund choice.
"Ambiguous objectives make it difficult to see what buyers might get out of a particular proposition at retirement in most cases," Cardano commented.
For trust based schemes the Department for Work & Pensions sets out the way in which the default’s features should be communicated as follows:
"The default option should have a high-level objective, which explains in broad terms what the default option aims to do and the strategy it will use to achieve this aim; this should be reflected by its name.
"The overall objective should cover a simple description of how the investment strategy will manage riskincluding what it aims to achieve for member outcomes."
For contract-based arrangements the Financial Conduct Authority’s view on all products, not just the default option, is that "clear product descriptions are necessary for investors to understand which strategies funds follow, how fund managers will invest on their behalf, and what risks are involved when investing".
"Firms need to provide customers with enough detail about a fund in a clear and concise manner that they can understand. Not providing enough information, or using jargon, can limit customers’ ability to make informed investment decisions."
Almost two-thirds of the funds analysed by Cardano had no clear performance objective.
No fund gave a clear link between pension contributions and expected benefits at retirement. About one-third of the plans did not have a stated benchmark, with about two-thirds also did not define what they meant by “risk”.
Examples of unclear objectives include a default fund aiming “to provide optimal outcomes for members regardless of the retirement income options they choose”, and another product that “seeks to generate a risk-appropriate investment return over the life of the fund”.
In the report Cardano concluded: " With this lack of clarity, we expect it to be extremely challenging for buyers to know what they’re getting."
Patrick Connolly, spokesperson for advice firm Chase de Vere, said it is important the guidelines set by the regulatory authorities are met.
"But there is also a problem that many default funds are "one size fits all" and with the advent of pension freedoms are no longer suitable for many people's current retirement objectives."
Nathan Long, senior policy analyst at Hargreaves Lansdown said the research was not about poor default funds, but about poor communication.
"Generally the default funds used within workplace pensions are of a high standard, but we cannot escape the fact that default funds are one size fits all and so cannot be right for everyone.
"Simply firming up the fund objectives would not go far enough, people need to understand where they're invested and why.
"They can also benefit from understanding how and why they may take more or less risk than the default solution.
"Put simply, pensions are long term saving accounts. For many people in their 20s and 30s in particular, taking on a bit more risk with such a long time to retirement could stand them in good stead."