AUTO-ENROLMENT
most employees are automatically
placed in what is known as the
“default” fund, which has to be
suitable for a wide range of people.
However, research from
Hargreaves Lansdown shows
that when auto-enrolment was
introduced, many providers
switched towards a lower-risk
strategy – in other words, put less
emphasis on shares – especially for
default funds.
While a balanced approach
to investing is wise, the general
consensus is that piling into
equities in the early days of pension
saving is a sensible strategy. After
all, history has shown that shares
are the place to be if you wish to
achieve strong long-term growth.
OVERLY CONCERNED
The well-observed Barclays Equity
Gilt study, which compares the
performance of different asset
classes, highlights that over 50
years, British stocks have produced
annualised real returns of 5.7 per
cent a year, compared with just
2.9 per cent from UK government
bonds.
Nathan Long, head of corporate
pension research at Hargreaves
Lansdown, says providers were
overly concerned that a drop
in value shortly after joining
the scheme could cause firsttime pension savers to leave en
masse. “Given that shares have
historically delivered the greatest
returns, it makes sense for them to
sit at the core for anyone saving for
the long term,” he said.
“But if we look at the main
pension providers, the proportion
invested varies significantly. The
lowest has somewhere near 55 per
cent in shares, whereas the highest
has 85 per cent or more.”
Long believes this move to lowerrisk default funds would suggest
that employees who are new to
pensions require a lower-risk
strategy than those who joined the
company plan in the past.
“This change suggests that the
trustnet.com
THE GENERAL
CONSENSUS IS THAT
PILING INTO EQUITIES
IN THE EARLY DAYS OF
PENSION SAVING IS A
SENSIBLE STRATEGY
default funds which were perfectly
adequate prior to auto-enrolment
are now deemed unusable, which
of course is not the case,” he added.
MITIGATING RISK
Mark Fawcett, chief investment
officer of the governmentbacked NEST workplace scheme,
challenges any assumption that its
default option is low risk. For its
part NEST’s default option targets
investment returns of inflation
plus 3 per cent in the growth
phase. This period, where the focus
is on increasing the value of the
retirement pot, can last up to 30
years. However, prior to this, in
the first five years of investment,
the portfolio is invested much
more conservatively when
arguably investors can afford to
take most risk.
Fawcett says: “NEST’s investment
approach is designed to meet
the needs of our members by
delivering realistic and sustainable
investment growth while aiming to
mitigate the risk of loss.”
However, many employers are
introducing financial education
programmes to help staff
understand their options. If you
are unhappy with the level of risk
in your fund, you can opt out of
the scheme and set up your own
private pension. But of course
if you do this, you will lose out
on your employer’s valuable
contributions. Ideally, savers should
have a personal pension running
alongside their workplace schemes.
TAKE CONTROL
You can access information about
your workplace plan via the pension
provider’s website, and here you can
take control, opting to move into a
higher risk fund or even to a more
cautious one. The level of risk you
should take depends on a number of
factors, including how close you are
to retirement.
However, given that savers
are faced with a huge choice
at retirement as a result of the
introduction of the new pension
freedoms in April this year,
engaging with your pension
as early as possible is likely to
help you make more confident
decisions.
Roy McLoughlin of advisory firm
Master Adviser says: “Inertia is a
dangerous thing when it comes to
pensions. The last thing any saver
should do is not re-engage with
their pension. Ensure that you stay
on top of it and that you remain
comfortable, not only with its
progress, but with the level of risk
you are taking.”
REAL INVESTMENT RETURNS BY ASSET CLASS (% PA)
ASSET CLASS
2014
10 YEARS
20 YEARS
50 YEARS
115 YEARS
Equities
-0.4
4.1
4.6
5.7
5
Gilts
16.4
3.7
5.1
2.9
1.3
Corporate bonds
10.7
2.5
N/A
N/A
N/A
Index-linked bonds
14
3.5
4.4
N/A
N/A
Cash
-1.2
-0.7
1.1
1.5
0.8
Source: Barclays Research
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