Defined Contribution  

Pension default strategies can put savers at risk

Pension default strategies can put savers at risk

Far more scrutiny is needed by employers to stop them unwittingly putting their employee pension pots in jeopardy, as providers defined contribution (DC) default schemes have huge variations, Punter Southall Aspire has warned.

The workplace savings and pensions company examined nine major DC pension providers’ default pension funds in their growth phase.

This market delivered strong growth over the past 12 months, Punter Southall Aspire calculated.

Article continues after advert

The total value of assets under management in the second quarter of 2017 for the providers rose to £24bn compared to £14.8bn in the second quarter of 2016.

Aegon, Aviva Investors, Fidelity, Friends Life, Legal & General, Royal London, Scottish Widows, Standard Life and Zurich are the providers addressed in the report.

Steve Butler, chief executive of Punter Southall Aspire, said the research “highlights for the second year running that DC default pension funds are far from standardised”.

He said: “Default doesn’t mean standard – far from it.

“With greater numbers of savers now enrolled in pension funds, employers have a duty to scrutinise their schemes to ensure they are on track to deliver the best retirement outcomes for their people.”

According to Mr Butler, “there are still huge variations in fund structures, objectives, asset allocations, the level of risk taken by providers and fund sophistication and employers need to take note”.

The allocation to equities, bonds and other asset classes varied dramatically between the default funds, depending mainly on the targeted risk levels and the range of investment tools used.

Over the last three years, the Zurich fund was the best performer (11.8 per cent), although on a relatively higher level of risk (9.3 per cent) compared to the other defaults, mainly due to the levels of equity within the fund (77 per cent equities).

In the same period, Standard Life produced the worst return (6.5 cent), but it does exhibit a consistently lower level of risk (5.2 cent) than all the other default funds.

When it comes to alternative investments, the average percentage of overall allocation is 6 per cent - but Standard Life and Royal London place the highest weights, 21 per cent and 19 per cent respectively.

Mr Butler said: “Investment diversification is key to managing risk during volatile periods. But again, the market varies widely.”

Providers such as Friends Life, Scottish Widows, Aegon and Zurich favoured a limited range of asset classes (with Zurich using the least, at four).

On the other hand, Legal & General, Fidelity, Royal London and Standard Life are more diversified incorporating commodities, high yield, property and other alternative investments alongside traditional asset classes.

“Greater diversification can lead to higher risk adjusted returns, especially in stress markets but on the flip side there can be more illiquid on occasion and investments are more costly, risky and more difficult to monitor,” he added.

Workplace pension schemes recently came under fire as research from consultants Cardano published in July showed funds failing to meet regulatory standards.

The report, which covered most leading pension funds in the sector, showed 38 per cent of the 29 funds analysed did not have clear fund objectives, despite regulatory guidance that this should be transparent.