Picking a winner in the workplace pension lottery


“Our research shows that differences between master trusts in their investment strategy and resultant investment outcomes can be literally hundreds of times more important in determining the size of members’ pension pots.”  – Nigel Dunn, LCP 

The investment strategies being pursued by differing workplace pension providers (whether the default is measured for a contract or master trust solution) is at last being recognised for what it is – the key determinant for people’s outcomes when saving through auto-enrolment.

In light of these findings, Dunn said those selecting a master trust should pay attention to investment returns and not just fixate on small charge differences.

But of course this means not just understanding how funds have “performed” but understanding why. The concept of “fund performance” is understood by investment professionals but is a mystery to the majority of savers who still see the growth they have in their savings as primarily to do with contributions and then to the rate of interest they have received.

The question “what’s the interest I get on my savings” sits uncomfortably with investment consultants who like to explain return in a complicated way. But of course the “interest” people get on their money is how they explain to each other why one pot has done better than another.

The complication comes because everyone’s return is unique to them, depending on the timing and incidence of their contributions as well as how and when charges have been taken.  It also depends on the competence of the investment administrators, the spreads paid on fund switches (especially in lifestyle programs). All of these complicated things are too much for most people to take in , collectively they can be called “performance attribution” but analysing them is why we have trustees, IGCs and GAAs, it is not the job of individuals to work out whether they have had value for their money, it is the job of the people who look after their money.

I have said it many times, but until we have a system that allows individuals to compare the return they have got (technically their internal rate of return) with the return others have got (the average rate of return), all this talk of “performance” is nonsense to the ordinary saver.

But comparing Legal & General’s poorly performing MAF default with Aegon’s supercharged Lifepath default is not something that anyone within the IGCs or master trusts is particularly keen to do. Why?

I suspect the answer is that it is much easier to talk of value for money as a “member experience” than as a “member outcome”, the member experience can be measured in ways that suit each provider and do not hold the provider accountable for poor performance -or indeed hold the IGCs and Trustees to account for something that they feel is beyond their control.

So let’s ask the question – is the return members receive on their money something that providers and fiduciaries should be held responsible. Should it be “their risk” as well as the member or policyholder’s risk?

As Stephanie Hawthorne’s article in Pension Expert says,

There is a wide difference between approaches, with master trusts such as Aon, LifeSight and Aegon that have allocated around 100 per cent to equities in the early years before retirement benefiting the most due to strong performance in the equity markets over the past five years.

So what made L&G and Aviva and Standard Life, who loaded up their defaults with diversified strategies (which haven’t paid off) do it? And why aren’t savers in their defaults being told what has happened to their money and why?

I think the answer is fairly obvious. The reason why insurers run workplace pensions is for fees that can be taken regardless of the outcomes of the funds. It really is a one way bet where the saver pays whether he’s done well or ill.

But that may be changing, The DWP has decided to take back the value for money agenda and put member outcomes first. That could mean that VFM becomes the meaningful item of information that it should be. It will mean that workplace pensions that have underperformed are shown to have delivered poor value for money and it could lead to some having to hand on the baton to better managed workplace pensions.

It could mean employers paying more interest in the pensions they are participating in and it could mean employees (or groups of employees) taking action where they feel their interests are not being considered by employers or providers.

This is what is happening in Australia where it’s a function of increasing balances in people’s Super accounts.

It is still some way away in the UK, but with the help of firms like LCP and AgeWage, picking a workplace pension should in time become less of a lottery and more of a game of skill.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Picking a winner in the workplace pension lottery

  1. Adrian Boulding says:

    The order of importance for influencing outcomes is
    1. Contributions
    2. Investment Returns
    3. Charges


  2. Bryn Davies says:

    But you know what your contributions will be; you can have a good idea what charges you will pay; but there’s no way of knowing what prospective return you will receive in future. It’s like sitting on a three-legged stool, when you are not sure whether one of three legs will be there.

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