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Delving into default pension funds

Default pension funds vary greatly in terms of investment approach, manager structure, performance and charging

Around nine out of 10 people rely on their pension provider’s default fund to save for their retirement, making it important to keep track of what is on offer.

We recently carried out an update to our study comparing the largest default funds by assets under management. As table 1 shows, these are all multi-asset, although to varying extents.

Investment approach

All contain equities and fixed income, while some hold alternative assets too. Alternatives offer greater potential for higher returns and diversification, but they can be more risky, expensive and less transparent.

In terms of an active or passive investment approach, there is a noticeable mix.


Auto-enrolment has only been running since 2012 and just six of the funds in our study have a five-year history. Ten have three-year numbers. As table 2 shows, annualised returns varied from 3.1 per cent to 11.8 per cent in the three years to the end of September. Disparity in performance remained after adjusting for the risk taken by each fund, both total risk and downside risk only.


There is also a variation in charges, with some funds having a relatively high annual management charge and others having a lower AMC but an initial contribution charge or fixed monthly administration charge too (see table 3).

The latter types tend to work better in terms of overall charges over the longer term (20 years or more), as there is time for the additional charges to become diluted. Those with the fixed monthly administration charge fare better with a larger pension pot, as the charge will form a lower portion of the bigger pot.

Manager structure

Finally, there is a mix of manager structure across the funds, with some keeping fund management in-house, either using managers from elsewhere within the organisation or investing directly in securities, while a few completely outsource to external managers and others use both in-house and third parties.

So, there is great variety. With some of these attributes, such as manager structure and investment approach, the choice of fund will come down to the attitudes of the employer or their adviser. But in terms of the other, more objective features, such as performance and charges, some funds are more competitive than others.

Patrick Norwood is insight analyst at Defaqto



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