The best and worst performing default funds for workplace pension schemes have been mapped, showing a return difference of 6 percentage points between them over the course of three years.
Financial information firm Defaqto disclosed the default fund performance of 24 pension providers across a one to five-year period, collecting data up to December 31, 2018.
It found that over a three-year period the best performing default fund was provided by SuperTrust UK, showing annualised returns of 11.9 per cent. This compared with the worst performer, NOW: Pensions, which achieved a 5.6 per cent return, a difference of 6 percentage points.
Rob Booth, director of investment and product development at NOW: Pensions, said: "Annualised returns for NOW: Pensions over one and two years compare extremely well against our peer group.
"Following the significant fall in the value of sterling after the Brexit referendum in June 2016, funds that chose not to hedge their overseas currency exposure received an unexpected windfall.
"We hedge our overseas currency exposures, which is part of our all-weather approach. Our members are paid in pounds; they save in pounds; and they are likely to spend the vast majority of their retirement pots in pounds, so exposure to the vagaries of the FX markets, which are so often driven by short-term political events, does not make sense to us. This is reflected in our relative three-year performance."
Defaqto's 41-page guide 'How to analyse workplace pension default funds' showed over a one-year period Willis Towers Watson was the best performer with a negative 1.6 per cent return whereas CEF NI was the worst with losses of 7.4 per cent.
SuperTrust UK was also the best performer when comparing five-year returns, at 10 per cent compared with Standard Life's 3.9 per cent, which was the worst performer, according to Defaqto.
A spokesperson for Standard Life said: "The investment approach of Standard Life’s Active Plus III is to maximise returns for customers for a level of risk. The fund is much more diversified and takes less risk than many other funds which have more concentrated strategies and comparatively high levels of equity exposure.
"Our focus is on the long term and ensuring that Active Plus III is likely to deliver the returns members need, at a level of risk that helps members are willing and able to make, that helps them to meet their target as consistently as possible. We believe that the fund has done this in the longer term and, through ongoing monitoring and review, we are ensuring it continues to do so in an ever changing environment."
Auto-enrolment was introduced in 2012, so at the moment funds will only have a five or six-year history.
Defaqto also noted that these figures are returns only and take no account of the fund’s volatility, ie, the risk taken in achieving these returns.
The Sharpe ratio on the other hand, which describes the fund's return minus the risk-free rate, divided by the volatility of these ‘excess’ returns, does take risk into account.
With this measure a higher number indicates better risk-adjusted performance.
When the 0.75 per cent risk-free rate was used, on a five-year basis, Nest (0.97), Legal & General (0.97) and SuperTrust (0.93) had the best risk-adjusted performance.
Over three years the same three providers plus Willis Towers Watson, the Mercer Master Trust, and B&CE (The People’s Pension) had the best performance, with Legal & General faring best at 1.17.
amy.austin@ft.com
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