Research from JLT Employee Benefits has found that the performance of the top ten defined contribution (DC) default funds has ranged from circa 3.5% to 9.5% per annum over the last three years. This means that employees who have been auto-enrolled into the lowest performing funds have been losing out on 6% return per year compared to those in the best performing funds. The research also uncovered big differences in volatility levels between the top ten default funds, with numbers ranging from circa 5.3% to 11.3%.
According to JLT Employee Benefits, this underlines the importance for companies to choose the best default strategy, as well as the best provider, for their employees when setting up a DC pension scheme, and then to monitor performance of their default fund.
Maria Nazarova-Doyle, Head of DC Investment Consulting at JLT Employee Benefits, comments: “Losing out on a 6% return per year could have a huge, irreversible repercussion on members’ financial position at retirement. For example, a person in their thirties saving 8% of their £30,000 p.a. salary in a DC pension could end up with c. £185,000 at retirement instead of c. £715,000.* This can dramatically change a pensioner’s life-style.”
“While there may be a very good reason why a certain provider/default strategy is selected, it is paramount that this decision is reviewed regularly in light of the default’s risk adjusted performance, as well as changes in regulations, scheme demographics and wider investment universe.”
“Much ink has been spilled as people fret about investment fees, but the problem we are highlighting is many times more serious. Considerations of whether fees should be capped at 0.75% or 0.50% pale into insignificance when faced with such a huge difference in performance between providers. In our previous example, had the fees been capped at 0.50% for the same strategies, the difference of 0.25% p.a. would only equate to c. £35,000 overall, which does not even begin to compare with the difference that is driven by potential returns. Therefore, the focus should be not on fees but on the investment quality of default strategies.”
Mark Pemberthy, Director, JLT Employee Benefits, adds: “Our research is a powerful reminder that investment returns are a vital factor in delivering good DC outcomes. Investment capability is a significant differentiator between pension schemes therefore our findings emphasise the importance of selecting a pension scheme provider based on overall value for money and not just cost or convenience, and having a robust governance framework to identify any changes in expected performance.”
*Source: JLT, assuming a 30 year old saver with an accumulated pot of £10,000, retiring at 65, annual salary growth of 1% and 8% annual contributions. Fees capped at 0.75% p.a.
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About JLT Employee Benefits
JLT Employee Benefits is one of the UK's leading employee benefit providers offering a wide range of benefit and pension services, including administration, actuarial and pension consultancy, investment, Self Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSASs) administration, flexible benefits, healthcare, benefit communication and financial education.
JLT Employee Benefits employs over 2,200 professionals throughout the UK and in 2013 had revenues of £172m in UK & Ireland.
Pensions and employee benefits companies within the JLT Employee Benefits group of companies include: JLT Benefit Solutions Ltd, Profund Solutions Limited, JLT Wealth Management Limited, JLT Investment Management Limited and Independent Trustee Services Limited. JLT Employee Benefits is part of Jardine Lloyd Thompson Group plc.
About Jardine Lloyd Thompson Group plc
Jardine Lloyd Thompson is one of the world's largest providers of insurance and employee benefits related advice, brokerage and associated services. JLT's client proposition is built upon its deep specialist knowledge, client advocacy, tailored advice and service excellence.
JLT is quoted on the London Stock Exchange and owns offices in 39 territories with some 9,000 employees. Supported by the JLT International Network, it offers risk management and employee benefit solutions in 135 countries.