The figure for the worst performance, 4.3 per cent a year, reflected those schemes that put in place cash defaults to encourage members to actively participate in pension fund selection. But the best DC defaults managed an annualised return of 17.4 per cent over five years.
The research highlights the way that asset allocation was more influential than the choice of strategy, whether active or passive, or fund manager for those funds participating in the survey that had 100 per cent equity default funds.
Over five years the highest observed out-performance of a benchmark was 90 basis points, resulting in a range of 220 basis points versus benchmarks for both active and passive all-equity funds. Absolute returns showed a wider spread of annualised returns, with a 720 basis point spread.
The research, which surveyed 31 predominantly trust-based DC plans across eight industry sectors and with more than 300,000 employee members, found little difference between performance for passive and active strategies for defaults, with passive slightly ahead of active over one and three year time periods by 1.1 per cent and 0.1 per cent annualised respectively, but an average of 2.8 per cent behind actively managed funds over five years.
The research also shows that the proportion of employees in the default fund tends to grow the larger the funds get and the more members they are. This could indicate that as pension scheme assets grow employers feel an increased obligation to offer scheme members the support of a well-run default, whether for trust-based or contract-based arrangements.
Graham Mannion, managing director of PensionDCisions says: “You can conclude from the data that active asset management does not seem to have added significant value in the equity arena for defaults, except during the turbulence of the 2001 and 2002.
“The research also shows that geographical allocations are a key driver of performance. Interestingly, some funds with a significant US exposure, hedged against currency fluctuation and that protected them from the dollar’s weakness.” “While companies in the UK have shifted significantly from DB to DC pension arrangements, they are still in the early stages of developing greater employee understanding and responsibility. 80 per cent of employees in DC plans are investing in default options. Two thirds of employers and trustees would like this figure to decrease. But despite this objective, our survey finds little evidence that current efforts to encourage more engagement are succeeding.”
