Higher charges produce better pension fund returns

Paying higher charges for pension investment funds produces a better return for pension scheme members, according to research by DCisions, the consumer insight firm.

The risk-adjusted performance of investment funds, grouped by fee level, indicates that lower-priced products, most of which were pure equity trackers, delivered a poorer risk/return balance than the higher-charging funds.

The 2012 DCisions report suggests that, over one and three years, investment products with a total expense ratio between 50 basis points (bps) and 100 bps (those in the middle range) have delivered the greatest value for money.

Nigel Aston, business development director at DCisions, said: “DC in the UK has gone through some growing pains and is now entering what could be a tricky adolescence.

“With auto-enrolment, the financial security of some 12 million people rests on the results delivered by default funds.

“This report is intended to help schemes, advisers, platforms and asset managers understand, calibrate and therefore deliver good outcomes to scheme members.”

The report, which incorporates analysis of both the supply and demand side of DC investment, also found:

• The level of investment decision-making by employees in pension schemes is low and has not changed over six years.

• As many as 80% of defined contribution (DC) pension scheme members opt for the default option.

• Women, on average, save a full 1% less into their pension than men do.

• The number of employers offering default pension funds which use multi-asset or target date funds in the provision of DC pension schemes is rising.

• 32% of the schemes surveyed directly employ multi-asset and target date funds, however 71% of asset managers recommend such funds.

• The de-risking period under lifestyling has increased from 7.9 years on average in 2007 to 9.6 years on average in 2011.

• 70% of schemes said that the plan sponsor or trustee has responsibility for asset allocation, while nearly 60% use white-labelled solutions, indicating the possible strong influence of the consultant.

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