Auto-enrolment default funds could leave pension savers short
A new study shows that those in auto-enrolment default funds could miss out by £500,000 to £2 million in their pension pot over a 50-year career.
The study was carried out by the industry group, the Tax Incentivised Savings Association (Tisa). It highlights that the millions of people that have their pension invested in ready-made default funds could see pension savers hundreds of thousands of pounds worse off in retirement. The research showed that over the past three years, default fund returns varied from 3.4% to 11.9%.
Tisa pointed out that if an individual on a 30,000 salary invested in a pension fund with an annual growth rate of 3.4%, their fund would be valued at 153,600 after 50 years. However, if they had invested in the pension scheme with the 11.9% annual growth rate, their fund would be valued at 2,271,200 over the same time period.
More than 10 million people pay into a workplace pension through auto-enrolment. Of those, 95% are auto-enrolled into defined contribution pensions with so-called "default strategies". This one-size-fits-all fix is convenient for employers, but may not always be the best option for employees. The onus is usually on employees to actively pick an alternative but it also emphasises how important it is for the employer to select a good quality default fund.
Research by JLT Employee Benefits had previously found that the default funds with better returns two years ago were no longer necessarily the best in the market today. So employers also need to monitor their default fund on a regular basis to keep an eye on any drop in investment performance. Defaqto, the fund rating organisation, found that the annual growth rate of the best and worst performers differed by more than 8 percentage points among the largest 20 default options. On long-term returns such a difference will have a huge impact.
Even a marginally better-performing fund can make a big difference to the size of an employees' your pension pot. Tisa pointed out that over 50 years, a 1% increase in fund performance is equivalent to a 3% increase in contributions.
With the majority of employees likely to remain invested in their scheme's default fund, either through inertia or choice, it shows why the investment strategy and structure of the default fund is crucial. It also emphasises why SMEs should look to review regularly the investment choices they offer and the make-up of their default fund, to ensure that they are meeting the needs of their members.
If you are looking to review your auto-enrolment scheme - and in particular the investment strategies behind the pension scheme itself - contact Kellands Corporate today.