There are a few things that jump out from this analysis:
- The highest returns have been generated by funds holding between 60-100% equities
That’s what we would expect. With greater risk can come greater reward, and a higher proportion of equities is associated with increased risk and reward.
Of course, just because funds have achieved these returns in the past 5 years, does not mean this is a trend that will continue. If economic winds change, that increased risk can result in greater losses that could be harder, or take longer, to recover from. Past performance does not guarantee future performance and greater levels of risk are generally only advised for those further away from needing to draw their pension.
However, given that many of the funds we’ve included in this analysis are ‘default’ funds (they are the funds 90% of pension savers have been put in automatically and never moved out of), it’s highly likely that there are investors who are wrongly in a low-risk strategy when a higher risk fund would have been more suitable for their particular retirement goals, financial circumstances, and appetite for risk.
As one commentator put it: settling for the default fund is like settling for a one-size-fits-all pair of jeans. They might perfectly suit a few people but for the majority, they’re not going to be the best fit.
Default funds are based on the likely best interests of the ‘average’ pension saver. If you do not match the profile of an average pension saver, it’s imperative you consider other funds with different objectives. Seek advice from a retirement specialist independent financial adviser or planner if you are at all concerned you might not be in the most suitable pension fund for your goals.
- There are big differences in performance between funds, even within the same risk category.
There are some very poorly performing funds within these results, with some even posting negative returns. In some cases, these are large funds looking after billions of pounds of people’s retirement savings.
In summary, billions of pounds of people’s retirement savings are not achieving their full potential. And as many are default funds, savers may have no idea.
Sitting in an underperforming fund for 30-40 years could vs choosing a fund that performs well and achieves its objectives could mean the difference between a dream retirement, and just surviving when your employment years end.
- Almost 45% (13 out of the 29 funds) did not beat the benchmark aligned to their fund risk category
- Almost 90% (26 out of 29) of the funds we’ve analysed have underperformed the FTSE All Share tracker over the past five years.
Funds are consistently underperforming their benchmarks. And it’s not a finding that is unique to our analysis.
For over 20 years, S&P’s SPIVAⓇ research has measured the success of actively managed funds against their index benchmarks. This research is very telling as it speaks to how many funds are meeting appropriate benchmarks for their objectives. The most recent findings are that an enormous 73.61% of funds in the UK have underperformed the S&P United Kingdom BMI benchmark.
What the SPIVA scorecard has found is that “actively managed funds have historically tended to underperform their benchmarks over short- and long-term periods. This has tended to hold true (with exceptions) across countries and regions.”
It has also found that “even when a majority of actively managed funds in a category have outperformed the benchmark over one time period, they have usually failed to outperform over multiple periods.”
Knowing this has implications when it comes to choosing a pension fund as actively managed funds come with higher costs. If those costs are not associated with better results, it begs the question of whether they are worth it.
- It’s not all bad news – there are some excellent funds far outperforming competitors
Star performers included the Nest funds, The People’s Pension’s funds, and some of the Aegon/Scottish Equitable funds.
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