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Around £5bn of savers’ cash is sitting in UK-focused pension investments that have underperformed a simple tracker fund by more than a fifth, according to new analysis.
The research, published this week, looked specifically at pension funds invested in UK companies and found that nine out of 10 underperformed a FTSE All-Share tracker over 10 years.
Almost three-quarters of the 208 funds surveyed — most actively managed — had underperformed the tracker by at least 10 per cent, and more than a third underperformed it by at least 20 per cent.
“It’s pretty shocking,” said Laith Khalaf, head of investment analysis at AJ Bell, the broker that carried out the analysis. “This doesn’t look like a market which is serving consumers well.”
Some of the worst-performing funds examined for the analysis — and typically now closed to new business — were run by the country’s largest pension providers.
One of the poorest performers was Standard Life/Invesco Perpetual High Income 4, which returned just 13 per cent over 10 years, compared with 73 per cent from an iShares UK equity index tracker.
Many of the funds scrutinised in the research were set up decades ago, when tracker funds were not widely available in the UK. Instead these so-called “closet tracker” funds, which largely follow an index, but charge fees in line with active funds, were sold to pension savers in large numbers.
Fees for actively managed UK equity funds can be at least four times higher than for a tracker.
“It’s a recipe for retirement disaster if your fund is a closet tracker which is largely following the index and deducting high charges every year,” said Khalaf.
Separate analysis by the Financial Times suggested that up to £5bn of savers’ cash could be in the worst 10 underperforming funds. The largest amount of cash, around £1.5bn, was held in the Standard Life UK Equity 4 Pen Fund, the second-worst performer, returning around 44.5 per cent over a decade.
Commenting on the analysis, Standard Life said following a review of its UK equity fund it had taken the decision to “move away” from the incumbent manager.
“The fund transitioned to the new strategy towards the end of last year and into the start of this year and we believe performance will improve as a result,” said Standard Life.
It added that while its Invesco Perpetual High Income fund had previously “struggled for a period”, its current managers had implemented “clear improvements” and this had been borne out by its performance over the past couple of years.
Scottish Widows, whose UK Equity 2 fund had returned just 47.5 per cent for savers over 10 years, and currently held around £665mn in savers’ cash, declined to comment.
Sun Life said the investment style of its fund, which returned 46.7 per cent over 10 years, was designed to deliver strong relative returns in falling markets and near market returns in flat or rising markets.
“While the current 10-year performance is behind benchmark, it has outperformed in 75 per cent of rolling 10-year periods since it was introduced to customers, with less volatility than benchmark,” said Sun Life.
Phoenix recently acquired Sun Life of Canada UK, including its funds. “Our goal for all our pension funds is to provide good outcomes aligned with long-term savings products,” it said.
When presented with the analysis, the Financial Conduct Authority said investment performance was important for ensuring that people can maximise their retirement savings.
At the end of July this year, new Consumer Duty regulations will apply to closed-book pension funds (those not open to new clients), aimed at ensuring savers in these plans get better value for money.
“Transparency about performance really matters,” said the FCA.
“We are currently working on bringing more transparency to the long-term value delivered by workplace pension funds and will publish that work shortly.”
Baroness Ros Altmann, a former pensions minister, said while the AJ Bell research had highlighted areas of poor fund performance, the criticism of active management seemed “rather overdone”.
“Index tracker funds are only one part of a diversified portfolio, with some active managers being able to add value even after fees,” she said.
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