How do you compare pension default funds?


apples and pears


An old colleague contacted me yesterday with a simple (but great) question. “how do you compare pension default funds”.

I can speak on this for First Actuarial, who provide the investment ratings on default funds for the Pension PlayPen and for Pension PlayPen who apply these ratings to the circumstances of each employer.

You could split the question into “what’s best” and more particularly “what’s best for you”.

This is my answer , but I’m looking forward to hearing what everyone else had to say when the FCA publish the results of their call for evidence later in the year.



It’s a great question. Of course this is what tries to do using a value for money benchmark which is (currently) all out own.

It’s not as simple as it was, in the past a workplace pension’s default fund targeted an event -retirement (a pretty nebulous notion but at least one that everyone thought they understood). Now defaults can target a certain age (or year), or a product (annuity, drawdown,cash) or even- (were we to see CDC) – death.

But the fundamental measurement always comes back to value for money and can only be based on anticipated outcomes based on likely probabilities of success.

To achieve anything like a fair basis of measurement, there has to be consistency in the way “value” as well as “money” are measured.

Even the “money” or “cost” measure is tricky. What might look like an investment AMC may be anything but. With the wholesale market price for a global equity tracker around 6-8bps, even the super-low AMCs of 25-30bps are clearly mainly a handling rather than an investment charge.

If you are paying 75bps (0.75%) for a default fund, you are probably only having 10% of your payment passed on to a third party. The rest is kept by the product manager.

But the 6-8bps being paid by the product operator may be subsidised by all kinds of member borne charges that the member doesn’t see. These might include the charging of secondary services to the net asset value of the fund (NAV) which creates a drag on the performance and but’s not part of the AMC (hidden charges).

It might also include the re-use of the fund for secondary purposes (stock lending) where the member’s stocks are re-used for the profit of the fund manager and to the detriment of the fund (stocks lent are not always returned).

So a value for money measure has to be independently measured from the AMC. The value measure is even more complicated as defaults split to do different things.

We may sometime see a reclassification of defaults around their targets (in the old days we had “balanced”, “equity”, “property” etc. In the future we may have “target date”. “whole of life” “annuity at retirement” “cash at retirement” etc. This at least would enable analysts to compare apples with apples.

Within each category we could then establish what members would be likely to get for their money – what the “value” was. To do this, there will need to be commonly agreed benchmarks for what a fund might reasonably be expected to achieve and then a risk adjusted return analysis that looked at how the fund was progressing based on both the actual performance and the risk taken to achieve that performance.

The ultimate performance measurement has to be a composite of the two strands of analysis (value and money). But the more fundamental question is what do I want my fund to do.

To use an analogy


If I can buy a functioning Ferrari for £10k and a functioning mini for £9k I might still struggle -tempted by an inappropriate choice (I don’t need a Ferrari- even though it is better fun).

If I bought the Ferrari because it appeared better value for money and then used it for the school run, it might be fun for a bit, but it would soon become tiresome (they’re a nightmare to park). The mini might have been a better fundamental option after all!

But if I’m looking at a mini for £9k and a Trabant for £9k, the choice is easy, in the same category of car- the mini wins hands down.


I won’t stretch the analogy because of course it also comes down to condition etc (when buying cars) and I know you can’t buy a first hand Trabant but I think this gives you the right picture.

The point I’m making is that we don’t (yet) have a proper system of comparing apples and pears , let alone different types of apples and pears and certainly no way of comparing value for money when we’re buying different apples and different pears.

If you wanted a simple answer as to why this is, I’d say it comes down to a lack of holistic thinking. Investment consultants (apart from the magnificent Adrian Kite of First Actuarial), still think about DC investment funds in terms of the past and not of the future. They don’t have a clear set of categories, they don’t properly measure costs (money) and they haven’t developed an outcomes based (risk-adjusted measure) for performance (value).

The FCA called for evidence on all this in April and we are now nearly in September. Hopefully they are busy thinking about what value for money looks like in a DC world and will take us one step of the way towards answering your question for the country.

We need more people asking your question Dominic, and more people thinking about it in a clear headed way. When an employer comes to me and asks me “what’s best for my staff”, I am expected to give him a straight answer, a comparison of the default fund is critical to that answer.

I can tell the employer what is best based on investment ratings, durability, communications, payroll interface and admin, at retirement strategy and of course cost. I can of course tell whether the provider is prepared to offer his product in the first place.

But our system is based on First Actuarial analytics and on the weighting to all the measures listed above determined by First Actuarial and by the adjustments made by the customers of Pension PlayPen to those ratings.

It is only one view, one way of doing things. But at least I can explain it and (for me at least) it is convincing.

What we need is a nationwide, consultancy wide, Government approved, answer to your question. I will continue to press for that and glad that other people (like you) are asking the same question

Kind regards

The Pension Plowman

Dominic Jessup

Dominic Jessup


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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