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Default pension funds underperform by almost 5 per cent a year

Direction-Business-Strategy-Choice-Decision-Crossroad-700.jpgMany employees are losing out financially by selecting the default fund options on their workplace pension, according to new research by Hargreaves Lansdown.

The research shows that these default options underperformed the most popular funds actively selected by workers – or their advisers – by 4.89 per cent a year, over the past five years.

One of the main reasons for this underperformance was the fact that most default funds are multi-asset vehicles, which typically have just 65 per cent of assets invested in equities.

This has led to more pronounced underperformance recently, with many global stock markets doubling in value over the past five years.

The Hargreaves analysis looked at the choices of almost 12,000 active members of workplace pension schemes. It compared the average performance of the 10 funds most widely selected, with the average returns of the default funds from nine large workplace pension providers – including Hargreaves Lansdown.

Over the past three years the average top 10 fund produced a return of 13.51 per cent, compared to the average default fund returning 9.35 per cent.

Over five years the average top 10 fund produced a return of 14.26 per cent, compared to a 9.38 per cent return on the average default fund – a difference of 4.89 per cent a year.

Hargreaves Lansdown said it was not releasing which were the most popular funds selected.

The research also shows that those who have larger pension funds, or have been scheme members for longer are more likely to make their own investment decisions.

For example, three out of four scheme members who have a pension fund of over £250,000 are more actively engaged in investment decisions, compared to around  30 per cent of those with assets of between £10,000 and £30,000.

More than 45 per cent of those who have been a pension member for between five and 10 years will exercise an active choice over their investments. This compares to just over 10 per cent of those who have been a member for less than a year.

Hargreaves Lansdown’s senior pension analyst Nathan Long says: “Default funds are a necessary element of auto-enrolment pensions, but by their nature they are designed as a one-size-fits-all solution, and are generally more conservatively managed. For most people better investment options are available.”

He adds: “This data suggests consolidating pension plans and making the management of these investments easier can boost engagement levels.”

Long says this supports calls from within the industry for employees to be allowed to choose which service they want their auto-enrolment contributions to be paid into, with default options for those that do not want to make this choice.

He says most people are looking to boost pension provision, but if it comes to a choice of paying-in more, working longer or getting a better return on their money, most employees would opt for the latter.

“Our research shows that those actively engaging with their pension options are achieving better returns.”



Increase auto-enrolment to 12%, adviser trade body says

The Government should increase mandatory auto-enrolment contributions to 12 per cent, advice trade body Pimfa argues. Responding to a consultation by fellow trade body the Pensions and Lifetime Savings Association today, Pimfa says that too much attention is still being given to participation rates in Government savings policy and not on whether enough is being saved. […]

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Who has topped the latest Spot the Dog list?

Aberdeen Standard Investments has been named the top offender in Bestinvest’s latest Spot the Dog report of underperforming equity funds. In the first bi-annual report by Bestinvest for this year the asset management giant, which was formed after the merger between Aberdeen Asset Management and Standard Life last year, has four funds listed in the report […]


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. I do generally like HL’s research, but this is a shocker.

    x fund has underperformed y fund because y fund has more equities, which have outperformed over the last 5 years, we now know.

    Come on guys, as reaserch this stinks by any measure. If we are going to make comparables using 100% hindsight, then until December 2017, your favoured fund y was, itself a totally bad call when compared to my hindsight selected alternative, Bitcoin. See. Two can play at that game.

  2. The rush to dilute equity content was started, I believe, by NEST saying we need lower the risk profile of DIOs so that we reduce the chances of nervous first time investors being scared away from pensions by sharp value falls. How many of these people even LOOK at their pension values?

    Numerous providers soon followed (like the mindless terrified sheep they are) and the net cost to members of this reckless conservatism will be incalculable.

  3. Typical tripe from HL. Lets select at random the best performing funds over the last 5 years with the benefit of hindsight and compare them to the default option. Any mug could do that, the hard part is picking the right ones over the next 5 years.

  4. If HL advised clients using the same approach they would be up in front of FOS in no time.

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