Employees set to lose £700 a year each due to misallocated pension savings

Auto enrolment default funds are failing to meet pension savers’ needs, finds new report

Employees in auto-enrolment schemes stand to lose out on savings averaging £700 a year because they do not actively engage with their pension savings, according to a new report by management consultancy Dectech.

The report highlights that the default funds into which people are automatically entered do not tend to meet their varying needs. It estimates that the £43 billion that will be invested in default funds each year from 2019 onwards could have been boosted by an additional £9 billion in investment returns.

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In an online survey of 938 employees, the report found that of people who are aware they have a workplace pension (61 per cent), the overwhelming majority (95 per cent) have never tried to customise their pension by actively selecting an alternative fund to save into.

Further, 91 per cent do not know where their funds are invested and 80 per cent do not know how much is in their pension pot. A third of people do not know who their pension provider is.

Once respondents were asked to choose their own funds, the report found that their choices were 11 per cent riskier than the average default fund.

The report estimates that each employee could increase the total value of the income they received in retirement by an average of around £180,000. This calculation is based on a 21-year old working for 47 years with a starting salary of £20,044, contributing 8 per cent to their pension with 1 per cent salary growth, fund return of 7.5 per cent and fund management charge of 0.15 per cent.

Self-chosen funds were assumed to provide returns averaging 8.33 per cent (based on the choice of 11 per cent riskier funds by those who chose an alternative).

Dectech is calling for the government, pension providers and employers to act now in order to tackle the challenge of lack of consumer pension engagement and ensure employees get the best outcomes from their retirement savings.

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Henry Stott, director at Dectech, says: ‘Our findings show that the one-size-fits all approach to auto-enrolment that has been adopted to date is damaging the futures of millions of people. Yes, auto-enrolment has successfully managed to get more people saving into a workplace pension, by using people’s tendency towards apathy to discourage them from opting out.

‘But the same apathy is leaving people invested in the wrong funds and so they are missing out on vital money in retirement.’ He argues that unless engagement is improved, auto-enrolment will do little to solve the UK’s retirement finance crisis.

‘While we’re pleased the DWP has included engagement as one of the key themes of its auto-enrolment review, it’s concerning that much of the narrative is focused on contributions rather than fund choice.

‘We estimate people could increase their income in retirement by an average of £180,000 if they left the default and chose a more appropriate fund in which to invest their money. It’s clear that more work is urgently needed to address the apathy problem and reduce the waste of savings.’

Dectech’s report recommends three steps that could help to get consumers more engaged with the way their pension is invested and the importance of taking an active interest in it:

Government should communicate how much money employees are throwing away by remaining disengaged. It should also emphasise that default funds are not recommendations and that better options may be available.

Pension providers should identify employees who have not made an active choice about where to invest, and send them tailored communications to highlight how much they stand to lose by relying on the default fund. They should also make it as easy as possible for customers to compare different funds and choose the ones which are best for them.

Employers should select pension providers whose funds best suit the needs of their employees. They should also prompt staff to review their pensions annually, so they can continuously re-evaluate whether their needs are being met by the funds they are invested in.   

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