Revealed: If your work pension scheme is a dud. We reveal performance of best and worst – and what you must do NOW to save your retirement

Workers saving into some of the UK’s most popular workplace pensions could be left hundreds of thousands of pounds worse off in retirement because their scheme is performing badly, Wealth & Personal Finance can reveal.

Around 16 million workers are saving into one of the 20 most popular workplace pension funds in the UK. A further 14 million have savings in one but are no longer paying into them.

New figures shared with us by leading financial title Corporate Adviser reveal a chasm between the best and worst performing funds. A saver with £10,000 invested in the best over the past five years would now be sitting on £16,647, while someone with the same sum in the worst would have just £11,660.

Sustained underperformance over decades of saving could result in workers in the worst-performing schemes retiring with significantly less in their nest egg than their counterparts in the best schemes. Here, Wealth investigates why some funds are doing so much better – and what you can do if yours consistently underperforms – before it’s too late.

Find out which fund you are in

Unless you have taken an active interest in your workplace pension, your savings are probably being channelled into a default fund chosen on your behalf by trustees of your scheme.

It works like this. When you start a new job, your employer automatically starts a pension for you – unless you actively ask it not to. There are exceptions if you earn under £10,000 a year, or if you are aged under 22 or above state pension age.

Your employer will pick a pension provider for you, which is responsible for investing the cash that both you and your employer contribute into your retirement savings every month.

Pension providers don’t come up with a bespoke investment strategy for each employee. Instead, they have default funds they invest your money in – unless you specify otherwise. Nine in ten workers have their cash in such default funds.

Workplace pension default funds delivered an impressive return of 40 per cent over the past five years on average, according to Corporate Adviser’s figures.

However, the top-performing default fund for younger savers – LifeSight – gave a return of 66.5 per cent, compared to the lowest performer, Legal & General’s Multi-Asset Fund, which returned just under 17 per cent.

Steve Webb, a former Pensions minister and now partner at pensions consultant LCP, says the performance of default schemes is vitally important because the vast majority of those in employee pension schemes are invested in them and their retirement prosperity will depend on it.

‘The differences between the highest and lowest return default funds are pretty stark,’ he says, urging those of us who are members of these schemes that are performing badly to ask the scheme trustees to consider whether they are making the right choices. The above does not apply to public sector workers or those with final salary pensions, whose retirement income is determined by their salary and tenure.

Will it really affect your retirement?

Receiving an annual return a couple of percentage points below average may not look like a serious issue. But if it’s sustained the impact is quickly magnified.

Take, for example, someone who begins saving at the age of 21 when they start a job with a salary of £25,000. If their pension fund returns 3 per cent a year, by the time they retire at the age of 68 they would have a pot worth £194,185. But if their pot grew at 7 per cent a year, they would amass £697,247.

The calculations, by online pension provider PensionBee, assume that the worker contributes 8 per cent into their pension, has charges of 0.7 per cent and that their salary increases by 2 per cent every year.

Why do some perform better than others?

It all depends what they are investing in. Default pension funds will typically invest in a mixture of company shares, government and corporate bonds.

In general, the higher the proportion of shares the greater the chance of strong returns. However, they tend to be riskier so there is an increased chance of heightened swings up and down along the way.

John Greenwood, editor of Corporate Adviser, says the reason the top-performing funds have achieved higher returns is that they contain a higher proportion of shares than the average.

‘Stock markets have performed well in recent years, so aggressive funds with a high proportion of shares have delivered better returns than those with more cautious investment strategies,’ he says. ‘Shares tend to perform better over longer time periods and the longer the time period is, the more likely this is to be the case.’

Steve Webb says that the trustees of employer pension schemes choose default funds with different strategies depending on the type of employees they have.

Those with higher earners may choose funds that take on more risk, for example. Those with lots of younger employees may choose less risky funds so as not to put off pension savers in the first few years of their employment.

How to check your performance

If you know the name of your pension fund, you can check its recent performance in the table on the right. If you don’t, you can find it on a pension statement, which your provider is obliged to send you every year.

Alternatively, you can ask your employer who your pension trustees are and ask them.

Your pension scheme is likely to have a handful of default funds to cover different age groups. That is because it doesn’t make sense to have a one-size-fits-all approach for all workers. While you are decades away from retirement, you can afford to take on more risk so you may have a completely different investment strategy to someone approaching retirement who may need to access theirs soon.

The first table shows the performance over five years of the most common pension funds for employees who are 30 years away from retirement.

The second charts the performance of the most popular funds for employees in the last year before retirement. It is not possible to show a longer time frame for this cohort because pension providers tend to move the nest-eggs of older workers regularly into gradually less and less risky funds as they approach retirement. An employee is unlikely to be in the same fund for the final five years before they stop work.

Top performance is not always best

When you are years from retirement, you can take risk and are able to target high returns. However, as you approach retirement, protecting what you have may become more important than making as much as you can. It all depends on what you have planned next for your savings.

If you intend to spend them soon after retirement – for example, by buying an annuity to get you an income for life – you may want to dial down your risk as you approach retirement. If you plan to leave most of it invested for many years to come, you should be able to afford to keep your risk levels higher for longer.

Richard Sweetman, senior consultant at independent financial services consultancy Broadstone, says that providers take very different approaches for older workers, which is reflected in investment performance.

‘It is very important that employees in this position understand how the investment strategy changes as they approach retirement and whether it is suitable for their needs,’ he says.

What to do If you aren’t happy

If your default fund isn’t leading the pack this year, don’t panic.

Hugo Gravell, principal and investment consultant at pension consultants Barnett Waddingham, says the most important thing is to check that it outperforms inflation, but you should not always worry about short-term performance. ‘Some funds are happy not chasing the top returns because they believe the stock market won’t keep rising forever,’ he says. ‘Instead, they focus on spreading their investments, expecting it to pay off in the long run and measure success differently.’

If your fund consistently underperforms, though, you might want to ask the pension trustees if it is the right option for your company and consider suggesting that they make a change.

In some cases they, or the pension provider, might have noticed already. The Legal & General Multi-Asset fund at the bottom of the performance table is no longer the primary default fund for those in L&G’s popular WorkSave Pension Plan and has been replaced with a new set of funds called Lifetime Advantage. 

A spokesman for L&G said the new funds are ‘expected to improve long-term retirement outcomes’. He added that the previous fund has returned 6.7 per cent a year since its launch in 2012 with less risk than a fund with more equities.

You can engage with pension trustees to ask them to consider changing their default fund if you are unhappy. ‘Members of schemes at the bottom of the league over the long-term may want to ask their trustees if they are being too cautious and will want to study annual reports and other documents to understand what is going on,’ Steve Webb says. You could also consider changing out of the default fund into other pension funds offered by the same provider that better suit your circumstances.

‘If it’s right for your personal circumstances, shifting between your provider’s options can have a massive impact on the amount waiting for you in later life,’ says Hugo Gravell, at Barnett Waddingham.

However, you may pay more for these non-default funds. Steve Webb points out that there is a cap on charges at 0.75 per cent for default funds but this does not apply to other funds.

Greenwood says that the most important thing to do if you’re in a workplace scheme is to stay invested and maximise contributions. ‘Leaving your workplace scheme is rarely a good idea because, even if the performance is not the best, you also benefit from a contribution from your employer, which is effectively free money,’ he says.

Instead, engaging, understanding and monitoring your default fund will help to ensure it remains fit for your purposes – hopefully giving you a handsome pension pot at the end of your employment.