‘Default’ doesn’t mean standard, according to Punter Southall Aspire, a major investment and workplace savings business, which publishes its third annual DC Default Fund reports today and urges employers to review the management and performance of their pension funds.
The two reports both entitled, ‘Who’s performing well?’ were produced based on data from sister company, CAMRADATA, and examine the growth phase and the consolidation phase of the standard default investment options of nine leading providers in the DC market at 31 March 2019. The analysis concentrates on the relevant underlying funds that best represent each lifestage. Huge variations in outcomes were revealed.
The reports highlight that in the growth and consolidation phases, funds varied in design and construction, investment risk and volatility, asset allocation strategy, return benchmarks, management and critically, performance. Furthermore, providers’ defaults adopted different ‘glidepaths’ towards retirement, which impacted overall performance and results.
Christos Bakas, DC Investment Consultant, Punter Southall Aspire, said: “This year, we’ve seen increased volatility in global asset markets, which means returns are much harder to achieve. This is reflected in our latest reports which reveal major variations in outcomes across nine DC providers.
“We urge employers to monitor the performance of their pension funds more closely, as default doesn’t mean standard, and not all funds are created equally. Employers need to keep on top of their funds and regularly check their performance; otherwise they may be putting their employees’ pension pots at risk.”
Highlights from the growth phase report:
- Allocation to equities, bonds and other asset classes varies dramatically between the default funds, depending mainly on the targeted risk levels and the range of investment tools used.
- In general, the growth phase of the average default option is designed with significant exposure to equities to maximise growth. The average allocation to equities was around 66%, with Scottish Widows’ Pension Portfolio 2 and Fidelity’s Growth Portfolio having the highest exposure at approximately 85%, while Legal & General’s Multi Asset Fund has the lowest exposure at approximately 35%.
- Default options also hold a significant portion of Fixed Income, allocating 25% on average to this asset class. Legal & General’s Multi Asset Fund has the highest allocation with 45%, while Royal London’s Governed Portfolio 4 has no exposure at all.
- Over the last three years, the Zurich Passive MultiAsset (V and IV) (now Scottish Widows) was the best performer (11.3%), although on a relatively higher level of risk (8.4%) compared to the other defaults. Standard Life (Stan Life Active Plus III) produced the worst return (5.4%), but it does exhibit a consistently lower level of risk (5.2%) than all the other funds analysed.
- These figures highlight the wide performance spread amongst the top and bottom performers, indicating the significance of the asset allocation in the growth phase to maximise members’ fund values.
Highlights from the consolidation phase report:
- Looking at the ‘5 years before retirement’ portfolios, Legal & General (MAF)[i]was the best performer (9.1%), although at a relatively higher level of risk (6.5%) compared to the other defaults (Legal & General have taken the decision to not implement a risk reducing strategy as members approach retirement).
- Standard Life (Universal Strategic Lifestyle Prolife) produced the worst return (5%), relative to the risk taken (4.7%).
- Looking at the ‘At retirement’ portfolios, Legal & General (MAF) was the best performer (9.1%), although at a relatively higher level of risk (6.5%) compared to the other defaults. Royal London (RLP Balanced Lifestyle Strategy) produced the worst return (2.5%), relative to the risk taken (4.1%). In terms of risk-adjusted performance, Legal & General (MAF) have the highest information ratio (1.05) using CPI as the benchmark.
- The only similarity across all providers in their equity glidepath is that the allocation to equities tends to decline as members approach retirement. However, the initial allocations, the changes to allocation and the at retirement allocation are different for almost every default strategy and depend mainly on the risk levels being targeted and the range of investment tools used.
- Conversely, the overall bond allocation tends to increase closer to retirement for most of the default solutions.
Finally, when it comes to fees (both growth and consolidation phase) even if charges vary from scheme to scheme, they remain crucial in the final outcome of each default strategy, as they affect members’ fund values and subsequently members’ available income at retirement.
The more diversified and sophisticated the default option, the higher the total cost. Therefore, providers need to ensure consistent performance and efficient protection from market volatility to create value for money and justify the higher fees.
To read both reports in full click here.