What is a default pension fund and should you switch?

Employers are required to enrol almost all of their employees in a workplace pension scheme once they start working – a process known as automatic enrolment. You and your employer will then pay contributions into the pot each month.

While most people know they have a pension, many are unclear where the money goes. Six in 10 are not even aware that it is invested, according to an Opinium survey of 1,200 people for Hargreaves Lansdown.

“A key reason why people may not realise their pension is invested is because they’ve never had to make an investment decision about it,” said Clare Stinton, head of workplace saving analysis at the investment platform. “When you are automatically put into a workplace pension by your employer, your money is typically placed into a default fund.”

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In many ways, this is a good thing. Left to their own devices, most people would not invest their savings and would almost certainly be left with an insufficient retirement pot as a result. That said, knowing where your money is going can help you make an informed decision about whether your default fund is the right option for you.

Some providers offer a selection of different options, for example, to cater to cautious, moderate and adventurous investors. It is not just about risk-return either.

“More people want their pension to reflect their values and what they stand for,” Stinton said. “That’s why many providers now offer the opportunity to invest in responsible funds, letting you steer clear of companies linked to things like weapons manufacturing, human rights abuses, or environmental harm.”

What is a default fund?

A default fund is where your savings are automatically invested when you join a workplace pension scheme. Nest, one of the UK’s biggest workplace pension providers serving almost 14 million members, said 99% of its members are in a default fund.

Every pension provider operates their default funds in a slightly different way, so it is worth looking at your provider’s approach to make sure it works for you.

Using Nest as an example, members are placed into one of 50 default funds based on their expected retirement date. This means their investment journey adapts as they move through different life stages.

When retirement is still some way off, the scheme invests in growth-seeking assets, aiming to beat inflation by 3%. At this stage of the investment journey, savers will take on more risk in the aim of generating higher returns.

Around 10 years before retirement, the fund starts to move into less volatile (and lower-returning) assets. This reduces the risk of large falls in value at a time when savers are nearly ready to access their pot.

This approach “takes the right level of risk at the right time, aiming to grow pots while protecting them from bigger shocks close to retirement,” said Liz Fernando, Nest’s chief investment officer. “The key thing for members is to check their intended retirement date is accurate, so they’re in the fund that suits them best.”

Not all default funds are the same

Familiarising yourself with your provider’s approach is important, as every scheme will invest in a slightly different way. This can include the point in time at which de-risking begins.

For example, the People’s Pension – another large UK scheme with more than seven million members – starts moving your money into lower risk investments 15 years before retirement. Nest, the example we looked at previously, begins this process around 10 years before retirement.

Unlike Nest’s 50 retirement date funds, the People’s Pension has three ready-made portfolios. The default option is the ‘balanced’ profile, which invests around 20% of its assets in bonds, a lower-risk asset class. The remainder goes into global shares (77%) and infrastructure (3%), which are more volatile but with the potential for higher returns.

While the ‘balanced’ profile is the default option, there are also two other ready-made portfolios – ‘cautious’ and ‘adventurous’. Forty percent of the ‘cautious’ fund is invested in bonds. Meanwhile, the ‘adventurous’ fund is fully invested in global shares (96%) and infrastructure (4%).

While neither of these two profiles is the default option, they also both start to de-risk 15 years before your selected retirement date.

Knowing that different options are available empowers you to switch into the fund that best meets your objectives. As Stinton points out, “default funds are designed to be a solid hands-off option, but they aren’t tailored to you individually”.

She adds: “Your pension is more than a pot of money – it’s an investment. The question is, is it working hard enough for you? Small decisions today can make a big difference to your tomorrow.”

Performance of default funds

Default pension funds also vary quite widely by performance. This can have a significant impact on overall returns and the size of your final pension pot and is something pension savers should monitor.

Performance over 10 years

Savers in Aon’s default fund have enjoyed the highest returns over the past 10 years, with cumulative returns almost three times that of Now: Pensions, the worst-performing default pension fund over this period, according to Corporate Advisor’s CAPAdata figures.

In total since 2015, Aon’s Managed Core default delivered a return of over 232%. This equates to an annualised rate of 12.76%, after charges. Over the same time period, savers in Now: Pensions default fund saw a return of just 88%, giving an annualised return of 6.52%.

Figures assume a typical 0.5% charge deducted from the annualised return, and relate to the growth phase of the default fund, which is for those 30 years from state pension age.

Other winners over the past 10 years have been savers in LifeSight, the pension run by WTW, which delivered the second highest return with its MRD default delivering cumulative return of 226.78%. This was followed by TPT Retirement Solutions, whose TDF default delivered 182.73% and Aegon, whose LifePath default delivered 167.24%.

Meanwhile some of the biggest names in the pensions industry have disappointed with below average returns since 2015. Standard Life has generated a cumulative return of just 89.65% on its largest default fund in terms of active members. Over the same time frame, L&G returned only 95.31% (for its LAF and MAF default funds) – both only just ahead of worst-performer Now: Pensions.

Aviva (on its MFF default fund), Royal London, L&G (for its TDF default fund), People’s Pension and Nest all also delivered below average returns over the past 10 years, meaning less than the CAPA average cumulative return of 139.37%.

However, the good news is all pension providers that have a 10 year track record have delivered returns more than double the rate of CPI inflation, and all but three have more than doubled members’ pots in this period.

More recent performance of pension default funds

For those approaching retirement, average default fund returns in 2024 fell just below the 5% level most consumers expect, according to the Performance Benchmark analysis from PensionBee, a pension provider.

Across the leading providers of default funds for those approaching retirement, average annualised returns – which take into account share price increases, capital gains, and dividends – dropped by 13.3% between 2023 and 2024, data provided in Corporate Adviser’s Master Trusts and GPP Defaults Report showed.

This means average returns fell from 5.73% in 2023 to 4.91% in 2024.

This is likely to have disappointed many pension savers, if they were aware of the drop. More than half (55%) of savers aged 55 or over see 5% or more as a ‘good’ return, a 2024 PensionBee survey found.

However performance varied with PensionBee’s new default 4Plus Plan, delivering an annualised return of 10.24% in 2024, consistent with its performance the previous year of 10.34%.

Not faring as well was the Aegon Workplace Default (ARC) fund – not only did it return, at 4.35%, less than the average last year, but this was a -38.12% drop from 2023.

Also among the worst performers, overall and in terms of year-on-year performance, was the Legal & General Multi Asset Fund. It returned 5.28% in 2023 and just 3.47% in 2024 – down -34.28% in 12 months.

Clare Reilly, chief engagement officer at PensionBee, said: “These findings highlight some of the continuing challenges facing UK retirees, with average default fund returns falling just below the 5% level that many would consider to be 'good' performance.”

With average performance dipping slightly below that threshold in 2024, but with a spread of funds above and below this mark, this highlights a gap in some cases between what savers hoped for and what funds delivered.

“It underscores the delicate balance savers are trying to achieve between growth and stability in their pension investments,” said Reilly. “For those approaching retirement, remaining engaged with performance is crucial.”

Source: Data from Corporate Advisers Master Trust and GPP Defaults Report 2024 and 2025. PensionBee data supplied directly from State Street Investment Management. Data from 1 January 2024 - 31 December2024. All figures are gross of fees.

Should you switch out of your default fund?

Default funds are the right option for many savers, but it is always worth doing a bit of research to make sure your investments align with your goals. Using the example of the People’s Pension, some younger savers might be interested in reading up on the ‘adventurous’ option.

Although equities are more volatile than other asset classes, their return potential is often higher too. A long investment horizon can help you ride out market volatility. Data from Barclays looking back over the past 120 years or so shows that equities have outperformed cash 70% of the time, based on a two-year holding period. If you extend the holding period to 10 years, it rises to 91% of the time.

A lot will depend on psychological factors like how comfortable you are taking risks, and ethical considerations too. Many providers offer funds with an environmental or social angle.

“We believe default funds are right for the majority of our members, but we understand that members might want to invest in line with their risk appetite, personal beliefs, long-term goals and faith, which is why we also offer other fund options like our higher risk, lower growth, ethical and Sharia funds,” said Fernando.

The dangers of switching

Be careful about switching into investments that you have to actively manage yourself. While choosing between ready-made funds with different risk profiles is relatively straightforward, building your own portfolio from scratch requires far more knowledge.

Switching out of the default could also mean your fund no longer de-risks automatically as you approach pension age.

This is not the case with the ‘cautious’ and ‘adventurous’ options offered by the People’s Pension, but eight other DIY funds offered by the provider do not come with the 15-year de-risking journey.

“If you decide to choose this profile you’ll need to make sure you regularly review the funds you’ve selected (and your attitude towards investment risk) as you near retirement,” the provider warns.

A research paper published by the People’s Pension and State Street Global Advisors in 2020 highlighted four key mistakes savers make when switching out of their default fund:

1. Chasing past performance: It is tempting to buy into a fund with strong past performance, but there is no guarantee it will continue. Some impatient investors then lose faith and hop from one fund to another, often selling out at the bottom of the market. Remember that pension investing is a long-term game.
2. Too many eggs in one basket: Diversification is the golden rule of investing. It might be tempting to back a sector or theme that is performing well – Big Tech, for example – but you need to balance it with other holdings in case the market turns.
3. Being too cautious: Being too risk-averse is a risk in itself. Over the long run, low-risk assets like cash and bonds tend to offer lower returns than more volatile investments like equities. Cash and bonds are also more exposed to inflation.
4. Forgetfulness or inertia: If you switch out of your default fund, you need to remember to continually review your investments as your circumstances change. It is down to you to start de-risking your investments as you approach retirement.

The research paper looked at the potential losses that come with each mistake based on five simulations (the above four mistakes versus the default pension saver).

Each investor saved for 33 years starting in 1986. They made monthly contributions of 8% throughout their career, based on a starting salary of £25,000 with 2% wage growth per year.

The research found that the default saver had £429,250 by retirement – the biggest pot of the five. The least successful pension saver was ‘Cautious Connor’, who invested in a money market fund and only managed to generate a pot worth £182,371.

^{Source: The People’s Pension and State Street Global Advisors, Workplace Defaults: Better Member Outcomes}