Defined Contribution  

Pension savers warned of default fund risks

Pension savers warned of default fund risks

Savers have been warned not to take default funds at face value, after research found providers were adopting radically different approaches in their defined contribution (DC) schemes

Two reports by investment group Punter Southall Aspire examined the default funds of nine major DC pensions, looking closely at asset allocation in the growth phase and in the consolidation phase.

Provider default funds adopted different glidepaths in the lead up to retirement, which impacted returns, the researchers concluded.

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In the growth phase, average allocation to equities was around 66 per cent, the analysis found, but Scottish Widows had exposure of 84 per cent while Legal & General and Standard Life had 44 per cent.

Meanwhile Legal & General and Fidelity had the highest allocation to fixed income at 47 per cent and 37 per cent respectively, which compared to an average of 27 per cent for all default funds analysed in the research.

Zurich was the best performing provider during the growth phase, producing a return of 7.3 per cent in the three years to the end of March, albeit with a higher level of risk than the other defaults, with a fund 77 per cent allocated to equities.

Standard Life produced the worst return over the same period at just 3.5 per cent but its default fund had a "consistently lower level of risk" than the other funds, the reports found, at just 5.3 per cent.

Steve Butler, chief executive of Punter Southall Aspire, said it was important scheme members had a solid saving and investing path, which meant selecting strategies with good fund diversification.

"This is our third report into DC default pension funds and again, we’re seeing wide variations, which may surprise some employers," he said. "Employers have a duty to actively manage their funds and regularly check their performance as they could be unwittingly putting their employees’ pension pots in jeopardy.

"Default doesn’t mean standard. With so many variations employers need to examine all aspects of their DC default fund carefully to understand exactly what they are getting and how their funds are performing."

In a statement, Standard Life defended its low-risk approach, which it said was designed to build a default fund with customers in mind that balances their need for returns in the long term, their capacity to take risk and their attitude towards risk. 

The spokeswoman said: "Active Plus III aims to maximise the long-term returns at a level of risk —based on research — that we believe the majority of customers are willing to take.

"In a period when equity markets perform very strongly (2016 and 2017), we would expect more concentrated strategies with relatively high levels of equity exposure to have done better. However, in other environments when equities do less well, Active Plus III is likely to do better in relative terms."

Jason Bullmore, head of investment propositions at Aviva, said: "We monitor our default funds closely and make changes when and where it is appropriate and in the best interests of members.