The standard view of default pension funds among personal finance journalists reflects the views of most IFAs – that they are a second-rate option for people who are not financially savvy enough to know they can do better or are too poor to see an adviser.
If an individual does not know what they are doing or has not got somebody holding their hand who does, they tick the default box. But as soon as they speak to an expert, they will be told to get out of the default option into something that will sup-posedly give better returns.
I find this situation perplexing and, from the consumer’s point of view, worrying. If these funds are so bad, why are employees being shoved into them in droves? What funds are the people getting professional advice being put into and why can’t everyone else get into them, too? Many advisers asked this question will say that it is impossible to give top-quality advice in a group situation because everyone is different.
But while it is true that somebody with a 1m nest-egg will have a different risk profile to someone who has nothing but the clothes they stand in, the reality is that the great majority of blue-collar workers in group DC arrangements will all want pretty much the same thing from their workplace pension, namely decent returns from equities for the majority of their working lives and a reduction in risk as they approach retirement.
Because default pension funds have to appeal to a wide range of individuals, their risk profile is inevitably going to be “middling”. So what extra returns could somebody getting individual advice from a professional hope to get by opting out of the default if their risk profile was also around five on a scale of one to 10?
Is the high-street IFA who constructs a bespoke investment portfolio for an individual really adding value beyond what the investment committee of a default fund can achieve or simply reinventing the wheel?
Nobody knows for certain, which means the passive v active argument will continue to run and run. But the media and, increasingly, the public will continue to wonder why their pension fund is not being run by some dream team of Bolton, Woodford, Nutt and Frost.
The difficulty with quantifying pension performance, particularly in the group environment where individuals may stay in the same fund for 40 years without considering whether to move or not, is that knowing where to draw the finishing line is extremely difficult. A default fund could have an exceptional 20-year run but could still do worse than a steady rival if its performance falls off a cliff.
Thankfully, there is innovation in the default funds sector but there are still hundreds of thousands of people in poorly-performing funds with high charges who could do better.
Advisers and providers need to be doing more to make sure that the default funds are doing more than simply tracking the average and where default funds are performing well, there is a public relations job to be done to make it known. The fact that perhaps the retirement savings of five million people are invested in default funds that are widely perceived as being so dismally run that anybody who knows what they are doing would not touch them with a bargepole should be of great concern to the pension industry administering and marketing them.
The issue is made even more pressing by the fact that the Government is intent on creating its own mega-default fund in 2012 or some time thereafter, with the advent of personal accounts. Arguing over the way this huge lump of cash is to be managed is inevitably going to put default funds in the spotlight, which is why Corporate Adviser is next month revealing the results of a poll aimed at finding which fund intermediaries think does the job best.
The trend towards DC pensions shows no sign of abating but if the private sector is to show that its mass market solutions can add value in terms of performance beyond whatever the NPSS is able to conjure up, it needs to improve both the operation and the perception of its default fund offerings.
John Greenwood is editor of Corporate AdvisorMoney Marketing.