Huge Variations In Outcomes Between Default DC Funds: Report

For example, in the growth phase, the analysis showed that allocations 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.

Over the last three years, the Zurich Passive MultiAsset fund was the best performer (11.3%), although on a relatively higher level of volatility risk (8.4%), compared with the other defaults.

The Standard Life default fund produced the lowest return (5.4%), but demonstrated a consistently lower level of volatility (5.2%) than the other funds analysed.

Punter Southall Aspire also found that, “in the broadest terms”, providers with their own asset management arm – Royal London, Standard Life, Fidelity, Aviva, Legal & General – had developed more diversified and sophisticated default offerings.

However, the company noted that “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,” it said.

With regard to the default funds’ consolidation phase, the analysis found that the only similarity across all providers in their equity glidepath was that the allocation to equities tended 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 being targeted and the range of investment tools used,” said Punter Southall Aspire.

According to the report, Legal & General did not implement a risk-reducing strategy as members approach retirement and “would argue that it’s difficult to predict when members will retire and in fact many members don’t know when they will retire”.

The reports can be found here.