The majority (94%) of group personal pension (GPPs) members invest in their scheme’s default fund, according to research by the Pensions Policy Institute (PPI) and Columbia Threadneedle.
Its annual The future book: unravelling workplace pensions report, based on data from from sources including the Office for National Statistics (ONS) and the Association of British Insurers (ABI), an in-house survey on defined contribution (DC) asset allocation and projections of future fund and membership levels, also found that 99.7% of master trust members invest in their pension scheme’s default fund.
The research also found:
- In July 2017, 8.3 million employees and approximately 700,000 employers have gone through auto-enrolment.
- There are 12.8 million active pension scheme members, with £373 billion of aggregate assets in DC workplace pensions.
- The size of the median DC pension pot at the state pension age is £28,000.
- Diversified growth funds deliver a median return of £88,000, lifestyle funds provide median returns of approximately £84,000 at the state pension age, and high-risk funds deliver a pension pot of about £102,000. This is based on a median earner contributing 8% into their workplace pension from age 22 to the state pension age.
Daniela Silcock (pictured), head of policy research at the PPI, said: “As bonds and equities are increasingly being viewed as less secure, DC pension funds, including master trusts, are looking more towards diversification by increasing investment in alternatives such as real estate, infrastructure and commodities. There is more focus on the use of diversified growth funds as an alternative for lifestyling. [Diversified growth funds] do not provide the same opportunity for high returns as funds more heavily invested in equities and may be less appropriate for those with high risk appetites, but they are less volatile and may therefore provide better long-term protection from investment losses.”
Michelle Scrimgeour, chief executive officer, Europe, Middle East and Africa (EMEA) at Columbia Threadneedle, added: “There are myriad issues facing pension savers and schemes, but what is becoming increasingly apparent is that people are not investing their pension in a way that makes the most of their money and protects them adequately against market downturns. According to Nest, people with low-risk appetites and low incomes are more likely to be put off by losses incurred during the early stages of pension saving and opt out, compounding the nation’s savings problem.
“What this analysis shows is that the majority of DC schemes invest in funds that may not be fit for purpose. Auto-enrolled savers in particular, but not exclusively, tend to struggle making active investment decisions, ending up in their pension scheme’s default fund. Lifestyle strategies have fared well over the last two decades, in a market environment that has experienced strong, multi-year returns from both equities and bonds. But they do not adequately protect savers against losses and we don’t expect these favourable market conditions to hold going forward.
“The key consideration for pension savers and trustees is which investment strategy best protects their assets while, in this context, providing the best possible financial outcomes. We believe in the long-run benefits of equities and bonds, but diversification is needed more than ever to guard against a potential market correction. With the ability to deliver inflation-plus returns as well as better protecting investors against downturns, actively managed [diversified growth funds] present a good, fit for purpose default solution for DC pension schemes and their members.”