Default funds weather Covid-19 storm

Default funds weather Covid-19 storm

Pension default funds have held up against stock market falls amid the economic crisis unfolding as a result of Covid-19, data has shown.

Often criticised because of their lower risk exposure and 'one-size-fits-all' asset allocation strategy, data from FE has shown these are performing better than the market as a whole and most actively-managed pension funds.

Moreover, according to commentators, default funds should bounce back in five years' time, for those clients with enough time until they need to take their pension.

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It also shows, as one adviser said, that active fund-pickers had "as much chance of picking a fund wisely as they do of finding a toilet roll on a supermarket shelf".

For example, data for the month ended March 17, showed the FTSE All-Share slumped 29.7 per cent while Standard Life’s default fund had dropped 16.1 per cent, L&G's default decreased 17.1 per cent, Aviva's default option lost 18.1 per cent and Scottish Widows's default pension fund fell 22.8 per cent.

Steven Cameron, pensions director at Aegon, said:  “Default funds are sometimes seen as not adventurous enough or not personalised enough to people’s risk tolerance, but given recent events, I expect many people will be feeling reassured that they’re invested in a default fund which typically contain a mix of assets and an average risk tolerance."

Nathan Long, senior analyst at Hargreaves Lansdown, said: “‘Default pension investments have seen big falls in the last month, but despite this, the story over five years looks far rosier. Default funds are well diversified, so while they’ve fallen in value they’ve held up better than the stockmarket as a whole. 

“The risk is that only a quarter of people actually know their pension is invested, and with markets having risen steadily since automatic pension saving began in 2012, we could see this abrupt fall cause unnecessary panic.”

Tom Selby, senior analyst at AJ Bell, commented: “Default funds are designed to give decent investment outcomes over the long-term to automatic enrolment savers who are not particularly engaged with their pensions.

"These figures are likely a demonstration of how diversification can help cushion falls during periods of extreme volatility. While someone invested in the FTSE All Share would have experienced a drop in fund value of nearly a third in the past month or so, default funds will tend to only have a partial exposure to companies from the index.

"The Aviva default fund, for example, holds just 14 per cent in UK equities, with the rest in a equities from other regions, bonds and cash."

However, he added: "There is no guarantee someone who picked their own stocks or funds would do any better or worse than these defaults."

Ivor Harper, director of Park Financial, thinks those actively picking their pension funds may have been hit much harder. He said: "If people had been choosing their own funds, the outcomes would have undoubtably been worse.