Automatic enrolment (AE) into workplace pension schemes has transformed retirement saving for good.
After it was introduced in 2012, the percentage of all employees joining their workplace pension scheme rose from under 50% to over 80% by 2024, according to the Department for Work and Pensions.
The number of members has increased from 11.6 million to 23.3 million.
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Yet many savers will have little idea how their money is invested. What arfe the default pension funds? Why were these funds chosen? What do they charge?
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Of course, it’s vital not to intimidate savers who know little about pensions and to make it easy for them to save for retirement.
But it is also preferable to give experienced investors enough information and choices to let them make their own decisions.
On this front, many pension schemes could still do a lot better.
Default pension funds can be unduly conservative
Let’s take Nest, which was set up by the government specifically to facilitate auto-enrolment and now holds roughly £50 billion in assets.
Nest offers six strategies, but says that over 99% of its members are in one of its retirement-date funds.
With a retirement-date fund – also known as a lifestyle fund or a target-date fund – your asset allocation depends on your age.
The strategy will shift your money from high-growth assets such as stocks to lower-risk assets such as bonds as you get closer to retirement.
Consider the Nest 2045 Retirement Fund, since this is in what Nest calls the “Growth Phase”, which implies a high allocation to equities.
Its largest holding is the UBS Nest Climate Aware Equities Strategy, at 43%, and it also has 5.1% in the Northern Trust Nest Climate Aware Emerging Market Equities Strategy.
Both are benchmarked against indices with environmental, social and governance (ESG) criteria (eg, they may exclude fossil fuels or other sectors such as tobacco).
In total, that’s 48.1% in broad equities, while 29.6% is in bonds and cash and the rest is in alternatives – property, infrastructure, private equity, private credit and so on.
For investors that don’t plan to retire for 20 years, this is a conservative asset allocation, yet also a complicated one, with various small allocations to alternatives.
While some risk-averse investors will be happy, others would rather be in a low-cost 100% global equity fund with no ESG mandate. This is a basic product, yet Nest does not offer it as a choice.
It seems fair to ask whether it is really earning a 1.8% initial fee and 0.3% annual management fee.
Review your default pension funds
Many other providers offer a wider range of funds to let you customise your portfolio, yet these are often surprisingly hard to use.
Scottish Widows offers an especially bewildering array of funds with different strategies in different series and different charges.
Fees for some of these are still over 1%, which is high for a large pension scheme that should have economies of scale.
Yes, dig in and you can find the Scottish Widows Global Equity CS8 tracker with an annual cost of just 0.1%, plus a range of other trackers – eg, US, UK, Europe, Japan and emerging markets.
But getting to grips with this may be painful enough to put many people off.
To be fair to Nest, default pension funds elsewhere can be much worse. Take Legal & General’s L&G PMC Multi-Asset Fund 3, the default in many workplace pensions.
This is supposed to provide steady growth with lower volatility, but it has left a lot to be desired. It has a low allocation of 40% to equities, including just 8.5% to North American equities.
Over five years, it has made an annual return of 4.7% – poor compared with its benchmark the ABI Mixed Investment, 40% to 80% Shares, which returned 5.9%, let alone global equities.
This is a fine example of why investors should check how their pension is invested and whether the asset allocation, performance and fees really stack up.
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