The pensions industry and employers have been urged to focus on pension net returns, as a 1 per cent increase could potentially add £150,000 to a worker’s retirement savings, according to research by Smart Pension.

The analysis, based on five-year annualised performance data from 21 providers, modelled outcomes for a typical 25 year old earning £30,000, with a £1,000 starting pot and retiring at 65.

It found that a 1 per cent increase in investment returns could improve retirement outcomes at an exponential rate and add over £150,000 to final retirement pots.

It also showed that a 35 year old with a £10,000 pension pot who considered switching from a workplace scheme to a retail provider offering a medium-risk strategy could be more than £165,000 worse off than if they remained in their workplace pension.

The research comes as the Pensions Schemes Act, including the value for money (VfM) framework, became law in April.

The VfM framework is designed to provide clearer, more transparent, and easier comparisons of pension fund values.

In addition, last week the Pensions Commission published its interim report, calling for system evolution, as 15 million people in the UK are currently undersaving for retirement.

Smart Pension said its research highlighted the importance of investment performance as a driver of retirement outcomes, and asked employers and advisers to pay closer attention to pension scheme net returns to help savers optimise their savings.

The master trust is also pressing the government and industry to apply VfM across the whole defined contribution (DC) market, including the retail sector by 2028, to create a level playing field and allow savers to make like-for-like comparisons based on value, not just cost.

Smart UK CEO, Jamie Fiveash, said: “We need a renewed focus on saver outcomes. Employees could stand to earn six figures more by being invested in a pension fund that performs just 1 per cent better.

"At a time when businesses and employers are stretched for putting more away in savings, a renewed focus on net returns can make a massive difference.

“Even small improvements in net returns at a population level could lift significant numbers of people over adequacy thresholds and have a wider impact on the UK’s economic health and addressing the UK’s worrying savings gap.

“We urge policymakers, employers and all the industry to act now, and to lean into both the spirit and focus of the new VfM framework.”

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