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.
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.
"Performance of our main default fund, My Future, during the growth phase, where the vast bulk of assets are currently invested, has been strong since launch to 30 June 2018, delivering an annualised return of 9.9 per cent with the level of risk taken 7.8 per cent, representing an attractive risk/return profile."
Iain McGowan, head of fund proposition at Scottish Widows, said: "Scottish Widows’ equity content is based on long-term modelling that demonstrates the contribution to investment returns.
"The level of equity content highlighted is indicative of the portfolios offered to members up to 15 years from retirement. From this point, we gradually reduce the equity proportion and the level of risk as the member approaches retirement.
"Our modelling demonstrates this to be an effective way of delivering returns to customers and this is supported by a ten year performance track record."
Steve Cranshaw, an adviser with Basildon-based Paragon Independent Financial Advisers said individuals typically have a "very limited knowledge" of where they are invested in their DC pension scheme and said employers should ensure they have suitable default options in place.
He said: "We have spoken to new clients that have a DC pension through auto enrolment and there can be a vast difference in performance between funds. There is very limited knowledge of where they are invested, the asset allocation and the sectors, in my experience."
The other providers named in the report – Aegon, Fidelity, Friends Life, Legal & General, Royal London, and Zurich – have all been contacted by FTAdviser for comment.
