Now Pensions default struggles as industry lacks standardisation

The embattled mastertrust, which has over 1m members, delivered annualised three-year returns of just 3.1 per cent in its Diversified Growth Fund up to September last year.

It is the latest in a series of headaches for Now Pensions, which withdrew itself from the Pensions Regulator’s mastertrust assurance list in 2017, and was fined £70,000 by the watchdog in February, both in relation to problems with legacy administration systems.

The Defaqto report reveals members have also experienced sluggish returns. As well as delivering the lowest absolute return, the scheme’s default scored lowest on two out of three risk-adjusted measures.

That’s one of the problems with the sector really, that there isn’t one preferred benchmark across all of the solutions

Richard Hulbert, Defaqto

With a score of -0.95, only Standard Life’s Active Plus III fund had a worse risk-adjusted return as measured by an information ratio relative to the ABI Mixed Investment 40-85% Shares benchmark, below Now Pensions on -0.89.

The information and Sortino ratios used by Defaqto reward performance over a given benchmark, and penalise various measures of volatility. Higher numbers indicate better performance.

Scottish Widows had the highest-returning default in absolute terms. On various risk-adjusted measures, Nest, Royal London, Friends Life and Legal & General Investment Management were consistently among the top performers.

Rob Booth, director of investment and product development at Now Pensions, said the fund’s use of diversification means performance had improved considerably since Defaqto’s September cut-off, with equity markets now looking less stable.

“We’re pleased that the Defaqto report acknowledges that our pricing structure is the lowest standard rate in the market. But, the returns quoted are out of date being over six months old,” he said, claiming that the DGF has returned more than 10 per cent since the start of 2017.

A spokesperson for Standard Life said: “When equity markets have performed very strongly, more concentrated strategies with relatively high levels of equity exposure will have done better. However, in other environments when equities don’t perform well, Active Plus III is more likely to outperform.”

Defaults are difficult to compare

Judging the performance of DC defaults is tricky, due to the lack of standardisation or accepted performance measures. The Defaqto report charts wildly different outcomes when judging funds on absolute returns compared with various risk-adjusted measures.

Performance benchmarks used by the various defaults varied greatly, although most used either the ABI Mixed Investment 40-85% Shares index, a composite benchmark or inflation plus 3 to 4 per cent.

“That’s one of the problems with the sector really, that there isn’t one preferred benchmark across all of the solutions,” said Richard Hulbert an insight analyst at Defaqto who co-authored the report.

He hoped that regulators might insist on a common date for reporting performance, for example, leading to easier comparisons.

Defaqto measured performance against a range of risk-adjusted standards. The variety of measures is potentially confusing, said Hulbert, but “if you consistently see negative numbers then one has to question what is going on”.

Industry split on diversification

The wide variation in returns in different environments could be due to different approaches to asset allocation. Hulbert said diversification showed some correlation with performance.

Aviva, Nest and Standard Life were all diversified across cash, fixed income, property, commodities, equities and derivatives. Now Pensions was invested in four of the asset classes.

But eight of the 19 providers surveyed were either only invested in stocks and bonds, or were only diversified by cash holdings.

Diversification is generally understood to be a good thing, but providers and the buyers of their services should not blindly follow a fixed allocation regardless of market conditions, said Ralph Frank, head of DC at Cardano.

“While market timing is an extremely challenging discipline, you still need to be conscious of this changing environment,” he said, recommending that investors think about “a range of different scenarios that might eventuate through time” when allocating their risk budget.

Costs are equally confusing

The fees providers charged to consumers also varied significantly, as did the cost structures used to do so.

“What would be very helpful would be if they had a uniform set of assumptions over the lifetime of the saver, and then calculated the cost for that saver,” said Frank.

In fact, the Defaqto research did this for someone earning £25,000, with salary growth of 2.5 per cent, 5 per cent investment growth, and an 8 per cent annual contribution.

Now Pensions topped the table by some distance with a value at 40 years of £339,464, followed by Nest. Joint last were 12 providers all charging a 0.75 per cent fee.

Asked if regulators should enforce this kind of disclosure, Frank replied that “it would be better if the industry did it itself”, but admitted that it “doesn’t have a great track record”.