If you are not interested or comfortable in choosing where your retirement savings are invested then it is likely you have chosen a default pension fund.  

It’s great that pension providers have made investing your retirement savings easier by allowing you to choose a default pension fund for the level of risk you are willing to take. This is certainly much better than sitting on your hands and leaving your money in cash.  

BUT, are these default pension funds worth it? Are you getting value for money and most importantly, giving yourself the best chance of a larger retirement pot and therefore retirement income? 

Our investment support team Betafolio have recently released their latest Multi-Asset Fund Report which assess this market. The results are very worrying indeed. 


The performance of your default pension fund


A default pension fund tends to be what’s called a multi-asset fund. A multi-asset fund is one fund that will invest your money into lots of other funds that focus on different types of investment and areas of the market.  

For example, if you chose a low risk option your fund would be invested more into fixed interest investments like government and corporate bonds. If you were higher risk then your fund would be invested more into shares of companies (equities). 

The alternative to using a multi-asset fund is that you choose the funds and how to allocate your money into the different areas.  

The latest Betafolio Multi-Asset Fund Report looks at 94 investment companies, covering 420 funds which together hold £189.47 billion of people’s money. 

So if you have opted for a default pension fund then it is likely to be in this list. 

The report analyses things like: 

  • Performance over 3, 5, 7 and 10 years. 
  • Risk adjusted returns – how the fund has performed relative to the risk taken. 
  • Volatility – how much the fund went up and down over the time period. 
  • Costs.

Each fund is given a ranking and then compared to a ‘No Brainer Portfolio’. The No Brainer Portfolio is made up of market benchmarks meaning if you did nothing else but copy the overall market this is what you would get.  

A lot of investment managers believe they have a special ability to beat the market and will tweak where they invest your money to try and get a better return. For example, they may think the UK has better prospects than the US and therefore will invest more of your money in the UK.  

Interestingly the report found: 

  • No multi-asset funds beat the No Brainer Portfolio average over the last 3, 5 and 7 years on a risk adjusted basis. 
  • During the ‘Covid Crash’ (where stock markets fell significantly) of 2020 there appeared to be no special protection offered by these investment managers. 
  • Investment cost was a big factor in the overall performance meaning funds with a higher cost tendered to perform worse than those with a lower cost. The median total cost was 1.16% per year and the highest cost was 3.9% per year! 


So to summarise, if you have chosen a default pension fund it is highly likely that you are not getting the best returns for your money and you are paying a higher charge for it. You are essentially swimming upstream. 

Ultimately this means your retirement savings might not grow as much and you will eventually receive a lower income from them in retirement.


Why default funds are rubbish and what you can do about it


So why does an industry that holds £189.47 billion of people’s money get away with charging for mediocre performance? 

Well it’s like I said at the start of this article, if you don’t have the time, inclination or skill to look into this more then you have no other option. Inertia is at play here. 

Big investment firms make a lot of money and they are therefore able to spend a lot of money marketing and putting together slick brochures that make it sound like they have a magic formula that can get you better returns.  

The evidence shows this is just not possible. No one can predict what happens next. All we do know is that history tells us humans will continue to invent and progress which means the great companies of the world will continue to make money. Over the long term investing in these global companies is the way to retire happy. 

In order to get the optimal investment portfolio for your retirement savings you need to focus on 3 main things: 

  1. Risk adjusted returns over the long term. Short term performance doesn’t matter, even long term performance doesn’t matter unless you understand what level of risk has been taken to achieve those returns. Risk adjusted returns allows you to compare apples with apples. 
  2. Risk. Understand what kind of falls can be expected from an investment during a short time period. The market will always go through phases of sharp temporary declines, you need to be sure you can cope with the drop. 
  3. Costs. Ensure you are not over paying for investment management. The median total costs in the Multi-Asset Fund Report were 1.16% per year which is more than most financial planners charge for ongoing advice. We know financial planning advice is far more valuable than just the investment management yet you could be paying more for investment management alone!

The above points are still no use to you if you don’t have the time, inclination or skill, however we do still have a solution.  

As well as focusing on our core financial planning services of maximising client’s retirement income, minimising their taxes and protecting their assets we also run our own investment portfolios.  

With Betafolio we have built our own RTS Investment Strategy which focuses on the evidence.  

When adding our own investment portfolios to the Multi-Asset fund research they beat not only all of the other funds listed on a risk adjusted return average over the last 3, 5 and 7 years but our Environmental, Social and Governance portfolios also beat the No Brainer Portfolio. 

The portfolio’s total cost along with the ongoing financial planning advice fee come in well under the total cost of many of the multi-asset funds which are only charging for investment management.   

If you would like help ensuring your retirement savings are invested based on the evidence and where you never worry about money then please schedule a no obligation free 15-minute call 

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.