JLT found that the annualised performance of these funds over the last five years (since the beginning of auto-enrolment) ranges from 6.3% to 12.5%, showing that the returns of the best performing defaults are almost double those of the worst.
According to The Pensions Regulator, 92% of defined contribution 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.
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.
Maria Nazarova-Doyle, Head of DC Investment Consulting at JLT Employee Benefits, comments: “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% to 8% 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.”
* This paper builds on our 2015 research into the risk and return profiles of the ten largest group personal pension (GPP) providers and highlights what has happened with their “in-house” AE defaults over the last five years.
** The average UK house price is £226,185 according to the UK House Price Index (HPI) for July 2017.
*** In order to calculate this, JLT had to make a number of assumptions, i.e. Hilary and Max have an annual salary growth of 1%; the values are calculated at age 55 for both individuals; the fees are 0.75% per annum.
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