There is a huge variation in the construction and performance of leading default funds, according to the latest pensions report from Punter Southall Aspire.
Its third annual DC Default Fund report looks at the funds from nine leading providers in the DC market, at both the growth and consolidation stage. The results show there is a huge variation in outcomes, highlighting the need for employers and consultants to review the management and performance of their pension funds.
The report highlights 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.
The report found considerable variation in asset allocation in the growth phase: for example Fidelity’s Growth Portfolio default fund had an equity allocation of 85 per cent, while Legal & General’s Multi Asset Fund had just a 35 per cent exposure.
The average equity allocation at this stage was 66 per cent.
The report shows that over the last three years at the growth phase Zurich Passive MultiAsset (V and IV) (now Scottish Widows) was the best performer with a return of 11.3 per cent, although on a relatively higher level of risk (8.4%) compared to the other defaults.
In contrast Standard Life (Stan Life Active Plus III) produced the worst return (5.4 per cent), but it does exhibit a consistently lower level of risk (5.2 per cent) than all the other funds analysed.
Looking at the ‘5 years before retirement’ portfolios, Legal & General (MAF) was the best performer (9.1 per cent), although at a relatively higher level of risk (6.5%) compared to the other defaults. The report points out that L&G have taken the decision to not implement a risk reducing strategy as members approach retirement.
Standard Life (Universal Strategic Lifestyle Profile) produced the worst return (5 per cent), at this stage relative to the risk taken (4.7 per cent).
The report also looked at the impact of fees at both the growth and consolidation phase. It pointed out that 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.
Punter Southall Aspire’s DC investment consultant Christos Bakas says: “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.”