Default DC pension funds

25 November 2018

This article was featured in the December 2018 / January 2019  issue of the magazine.

Steve Butler, chief executive at Punter Southall Aspire, comments on the performance of default funds and the implications for employers 

Many companies assume their default defined contribution (DC) pension funds are standardised across the industry, but this is far from the case. 

Two editions of the new Who’s performing well? report published recently by Punter Southall Aspire have revealed huge variations in the performance of default funds, highlighting the need for employers to scrutinise performance far more closely to ensure the best pension outcomes possible. The reports examined nine major DC pension providers’ default pension funds, both in their growth phase and at their consolidation phase (as of 31 March 2018). 

The reports showed that during the growth and consolidation phases, funds can vary in design and construction, investment risk and volatility, asset allocation strategy, return benchmarks, management and critically, performance. 

Many of the providers’ defaults also adopted different ‘glidepaths’ towards retirement, which impacts the overall performance and results. This is our third report into DC default pension funds and we’re still seeing wide variations, which may surprise some employers. 

So, what are the key findings of the reports?

Most of the default funds sit within assets under management in a range of approximately £600million and £13billion, depending mainly on their launch date.

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

In the broadest terms, those providers (Royal London, Standard Life, Fidelity, Aviva, Legal & General) that have their own asset management arm have developed the more diversified and sophisticated default offerings. 

In general, the growth phase of the average default option is designed with significant exposure to equities to maximise growth. Default options also hold a significant portion of fixed income, allocating 27% on average to this asset class. 

Over the last three years, the Zurich fund was the best performer (7.3%), although on a relatively higher level of risk (9.5%) compared to the other defaults, which is no surprise given the levels of equities within the fund (77% equities). 

In the same period, Standard Life produced the worst return (3.5%), but it does exhibit a consistently lower level of risk (5.3%) than all the default funds. 


...employers must examine all aspects of their DC default fund carefully...


These figures highlight the wide performance spread amongst the top and bottom performers, indicating the significance of the asset allocation in the growth phase to maximise members’ fund values. 

The timing of when the growth phase period ends, with assets moving gradually to lower risk assets, also differs significantly amongst all the providers, which could have a significant impact on members’ fund values. 

The longer the period provides members with more chance of creating higher fund values at retirement, but also less downside protection as they get closer to retirement.

The report analysis for the consolidation phase is broken down into two periods of time, five years before retirement and at retirement, and uses the underlying fund allocation of the default strategies during those time periods to assess how well they align with their retirement objectives and to establish if they still provide efficient growth (relative to the level of risk taken) at the different glidepath stages.

The report found that the only similarity across all providers in their equity glidepath is that the allocation to equities tends to decline as members approach retirement. However, the initial allocations, the changes to allocation and the ‘at retirement’ allocation are different for almost every default strategy and depend mainly on the risk levels and the range of investment tools used. 

Conversely, the overall bond allocation tends to increase closer to retirement for most of the default solutions. 

Finally, there is the question of fees. The more diversified and sophisticated the default option, the higher the total cost. Therefore, providers need to ensure consistent performance and efficient protection from market volatility to create value for money and justify the higher fees.

To conclude, the reports highlight that default is anything but standard. With so many variations employers must examine all aspects of their DC default fund carefully to understand exactly what they are getting and how their funds are performing.

And, given the fact the global asset markets have changed in recent months, with high positive returns much harder to come by and volatility rising, more than ever members need a solid saving and investing path. To achieve this, they need to select strategies with good fund diversification and the ‘wise’ use of active management to enhance returns. 

Employers also need to review the management and performance of their funds regularly to ensure that at retirement, their employees get the best pension and retirement possible. They have a duty to actively manage their funds and regularly check their performance; otherwise they could be unwittingly putting their employees’ pension pots at risk.