Savers in the worst performing defined contribution default funds could be missing out on up to £300,000 by the time they are 55, JLT Employee Benefits has found.
Research by the firm has found a huge disparity of the investment performance of the UK’s top 10 DC default funds. The annualised performance of these funds over the last five years, ranges from 6.3 per cent to 12.5 per cent.
According to The Pensions Regulator, 92 per cent of DC pension savers are invested in a default strategy that their employer chooses on their behalf. Whilst they are able to switch funds, most people remain in the default, either suggesting that they trust that their employer has made the best decision for them, or that they are not sufficiently engaged nor financially literate to make an informed choice.
JLT believes this finding underlines the magnitude of employers’ responsibility in selecting a good quality default investment strategy for their auto-enrolment pension scheme.
In addition, the research found that the funds that had better returns two years ago, didn’t necessarily remain the best ones in the market, highlighting the need for employers to monitor their default fund in order to identify any drop in performance.
Commenting on the findings, JLT Employee Benefits head of DC investment consulting Maria Nazarova-Doyle said: “Drawing from our experience advising thousands of UK employers on group personal pensions, auto-enrolment default funds are not as plain vanilla as one may think. The disparity in their strategies and risk-return profiles could lead to a huge retirement shortfall, amounting to the equivalent of a property. It is alarming to see that the situation hasn’t improved since we raised this issue two years ago.
“The importance of choosing a good quality default strategy cannot be overestimated. It is tempting for employers to focus on keeping costs down, which is entirely understandable, but it shouldn’t be to the detriment of fund selection. Statutory contributions are set to quadruple from 2 per cent to 8 per cent in the next two years and this is a step in the right direction. However, this would have a limited impact if it isn’t backed up with sound investment decisions.
“It is not sufficient to pick a good default investment strategy at the outset and let it run its course. Investment strategies that perform well one year can do poorly another year. Default strategies are like gardens – they need constant monitoring and tending for the best results. They need to be reviewed to ensure they remain appropriate for the type of membership of a scheme as it evolves.”