Workplace Pension winners and losers- Punter Southall Aspire do the numbers (Now with added NEST!)

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Employers selecting DC default investment funds for their workforce pensions assume they’re making a wise investment choice. However, a new report, ‘Who’s performing well?’ from Punter Southall Aspire, which examined nine major DC pension providers’ default pension funds in their growth phase (as of 30th June 2017), reveals huge variations that could deliver diverse outcomes for savers.


Employers may assume default funds are standardised in the industry, but the report highlights the opposite. Funds vary in design and construction, investment risk and volatility, asset allocation strategy, return benchmarks, management and critically, performance – suggesting far more scrutiny is needed by employers to stop them unwittingly putting their employee pension pots in jeopardy.

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Funds vary in asset allocation



On a positive note, the market delivered strong market growth over the past twelve months. The total value of Assets under Management (AUM) in Q2 2017 for the providers rose to £24,005,155,499 compared to £14,808,248,400 in Q2 2016, an increase of £9,196,907,099.


Most default funds sitting within an Assets under Management ranged between £330m and £2bn but the value reflects whether they are new funds designed and launched to be the DC default such as Fidelity’s default which started in 2015 or mature funds from Scottish Widows and Legal & General repurposed for auto enrolment and pension freedoms to meet member requirements.

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Default Funds vary in size



This is the reflected in the individual AuMs. The Scottish Widows fund launched in 2006 has a a total AUM of £11,683,055,584 and Legal & General’s fund which is also mature has £5,257,933,083 – far higher AuMs than other providers.


The allocation to equities, bonds and other asset classes varied dramatically between the default funds, depending mainly on the targeted risk levels and the range of investment tools used.


Providers such as Royal London, Standard Life, Fidelity, Aviva, Legal & General with their own asset management arms have developed more diversified and sophisticated default offerings.


In general, the growth phase of the average default options for the providers reveals that most funds have significant exposure to equities to maximise growth. The average allocation to equities was around 62%, with Scottish Widows’ default having the highest exposure at 85%, while Legal & General has the lowest at 45%.


Default options also hold a significant portion of Fixed Income, allocating 26% on average to this asset class. Legal & General and Fidelity have the highest allocation with 47% for both, while Royal London have the lowest exposure with 0%.


Steve Butler, Chief Executive, Punter Southall Aspire, said: “Our analysis highlights for the second year running that DC default pension funds are far from standardised – there are still huge variations in fund structures, objectives, asset allocations, the level of risk taken by providers and fund sophistication and employers need to take note.


Take the levels of exposure to equities. Scottish Widows has 85% of funds invested in equities – a very astute move in today’s rising market, but what happens if the market falls? Equally, could Legal & General with just 45% in equities get better returns with more exposure particularly as many employees will be invested for the next 40 years? It begs the questions? What is the optimum level of risk and exposure to equities and should some providers be more cautious and others less risk averse?


There were huge contrasts in fund diversification too. Some providers are spreading their investments across a range of asset classes in the UK and globally and others a far more limited range.


Most defaults don’t use Alternative Investments, which includes investments such as commodities, property and absolute return strategies – mainly due to cost constraints.


The average percentage of overall allocation to Alternative Investments within the default funds is almost 6%, but Standard Life and Royal London place the highest weights, 21% and 19% respectively. Equally, the average allocation between UK and non-UK assets was 27% and 73% respectively, with Aegon and Zurich having the highest concentration in the UK region with approximately 50% of their total assets.

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These funds have huge variation in performance



Steve Butler said, “Investment diversification is key to managing risk during volatile periods. But again, the market varies widely. Providers such as Friends Life, Scottish Widows, Aegon and Zurich favour a limited range of asset classes (with Zurich using the least, at four) but at the other end of the scale Legal & General, Fidelity, Royal London and Standard Life are more diversified incorporating commodities, high yield, property and other alternative investments alongside traditional asset classes. Greater diversification can lead to higher risk adjusted returns, especially in stress markets but on the flip side there can be more illiquid on occasion and investments are more costly, risky and more difficult to monitor.”


The report also revealed there is no standard approach to measuring performance of DC default funds – providers use a variety of different comparators (peer group sectors, composite benchmarks, cash or inflation indices) based on the strategy’s objectives and asset allocation.


Over the last three years, the Zurich fund was the best performer (11.8%), although on a relatively higher level of risk (9.3%) compared to the other defaults, which is no surprise given the levels of equity within the fund (77% equities). In the same period, Standard Life produced the worst return (6.5%), but it does exhibit a consistently lower level of risk (5.2%) than all the default funds.


Steve Butler, Chief Executive, Punter Southall Aspire, said: “Employers must examine all aspects of their DC default fund carefully to understand exactly what they are getting and how their funds are performing.


“Default doesn’t mean standard – far from it. This is the second year we’ve analysed the industry and little has changed. With greater numbers of savers now enrolled in pension funds, employers have a duty to scrutinise their schemes to ensure they are on track to deliver the best retirement outcomes for their people.”



The nine default funds examined are run by Aegon, Aviva Investors, Fidelity, Friends Life, Legal & General, Royal London, Scottish Widows, Standard Life and Zurich. This is the second annual report from Punter Southall Aspire tracking the default funds market.


Aspire have just published their results for NEST in Corporate Adviser. They confirm independent research by Defaqto last year, confirmed by work done by Con Keating and myself, that NEST is currently delivering the best risk adjusted return of any provider

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This is really great work by a top firm of consultants, but more needs to be done to raise awareness among employers that not all workplace pensions are the same and that outcomes will vary according to the decisions they take on their choice of workplace pension.

This blog will continue to highlight good work, wherever it is being done and promote best practice! Well done Punter Southall Aspire, now to have a chat with my colleagues at First Actuarial – the bar has just been raised!

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About henry tapper

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