On the go: Employers should look under the bonnet when reviewing their default fund as there is a huge variation in asset allocation and performance of these products, according to Punter Southall Aspire analysis.
The investment and savings business’s research, based on data from its sister company Camradata, explored the growth and consolidation phases of standard default options from nine defined contribution providers.
It showed that over the three years to March 31 2019, the Zurich Passive MultiAsset (V and IV) – now part of Scottish Widows – was the best performer (11.4 per cent) although on a higher level of risk (8.4 per cent) than the other defaults.
Standard Life’s Stan Life Active Plus III fund produced the worst return (5.4 per cent), albeit with a lower level of risk (5.2 per cent) than all the other funds analysed.
Funds varied in design and construction, investment risk and volatility, asset allocation strategy, return benchmarks, management and, critically, performance.
Providers’ defaults also adopted different glidepaths towards retirement, which impacted overall performance.
Commenting on the report, Christos Bakas, DC investment consultant at Punter Southall Aspire, stressed that “default doesn’t mean standard, and not all funds are created equally”.
He said: “Employers need to keep on top of their funds and regularly check their performance, otherwise they may be putting their employees’ pension pots at risk.”
In broad terms, providers that have their own asset management arm within their group – such as Royal London, Standard Life, Fidelity, Aviva and Legal & General – developed the more diversified and sophisticated default offerings, according to the report.
The average allocation to equities was around 66 per cent, with Scottish Widows’ Pension Portfolio 2 and Fidelity’s Growth Portfolio having the highest exposure at 85 per cent approximately.
Legal & General’s Multi Asset fund had the lowest exposure, at 35 per cent approximately of its total asset allocation, followed by Standard Life with 42 per cent.
Default options also held a significant portion of fixed income, allocating 25 per cent on average to this asset class. Legal & General had the highest allocation with 45 per cent, while Royal London had no exposure at all.
The average allocation between UK and non-UK assets was 31 per cent and 69 per cent respectively, with Aegon and Aviva (My Future) having the highest concentration in the UK region of their total assets with 55 per cent and 49 per cent respectively.
Consolidation phase
Legal & General’s fund was the best performer (9.1 per cent) among the ‘5 years before retirement’ portfolios, although at a higher level of risk (6.5 per cent) compared with the other defaults. Legal & General have taken the decision to not implement a risk-reducing strategy as members approach retirement.
Standard Life produced the worst return (5 per cent) relative to the risk taken (4.7 per cent).
For the ‘at retirement' portfolios, Legal & General was the best performer (9.1 per cent), and although at a higher level of risk (6.5 per cent) compared with the other defaults, had the highest information ratio at 1.05. Royal London's strategy came second, with an information ratio of 0.96.*
A spokesperson for Standard Life said that the investment approach of its Active Plus III is to maximise returns for customers for a level of risk, and that the fund "is much more diversified and takes less risk than many other funds which have more concentrated strategies and comparatively high levels of equity exposure".
The spokesperson added: "Our focus is on the long term and ensuring that Active Plus III is likely to deliver the returns members need, at a level of risk that members are willing and able to make, that helps them to meet their target as consistently as possible. We believe that the fund has done this in the longer term and, through ongoing monitoring and review, we are ensuring it continues to do so in an ever changing environment."
Standard Life pointed out that its consumers have a choice of five risk profiles within the Active Plus fund range, and can take more or less risk than Active Plus III if they wish to do so.
*Incorrrect data supplied by Punter Southall Aspire led an earlier version of this article to state that Royal London's at retirement fund was the worst performer. Punter Southall Aspire has since corrected its data.
