Auto-enrolment means millions more workers now have pensions – but are they any good? We look at what you can do to improve your options
Since auto-enrolment began in 2012 more than nine million more workers have invested in a pension. But how good are these workplace pensions and what are your options to tailor them to your individual and changing needs?
If you’ve been auto-enrolled, you first need to find out what type of pension you have. It’s most likely to be a defined contribution (DC) scheme, in which you and your employer contribute towards your pot.
This could be in the form of a company pension, arranged by your employer, or a master trust, where multiple employers pool their assets and resources in one place. In master trusts, each employer has its own division but there is only one board of directors, which allows employers to manage a pension scheme with lower costs and simpler governance.
According to The Pensions Regulator (TPR), the number of people whose pension is saved in a master trust has risen from 270,000 in 2012 to more than 13 million – nearly two in five workers in the UK (37%).
Find out how your pension is invested
Once you know what type of pension you have, you should find out how it’s invested, to ensure your money isn’t languishing in an unsuitable fund.
The default fund that most employees are placed in typically invests around two-thirds of your money in the stock market and uses a ‘glide path’ as you approach retirement, progressively moving your money into safer asset classes. But some people, such as those who have years to go before retirement, may want to increase their stock market exposure.
Nathan Long, senior pension analyst at Hargreaves Lansdown, explains: “Default funds are a necessary element of auto-enrolment pensions but, by their nature, they are designed to be a conservative one-size-fits-all solution. For most people, better investment options are available.”
How the pensions stack up
Some company pensions allow their employees to invest in a wide range of funds, while others offer a very limited selection or no choice at all.
It’s a similar story with master trusts, where the five largest schemes account for more than 13 million members and 758,327 employers and manage in excess of £17 billion. The five providers are: Legal and General WorkSave Master Trust and RAS Master Trust, NEST Pensions, NOW: Pensions, Standard Life DC Master Trust (SLDCMT) and Stan Plan, and The People’s Pension. See the table (below) for a breakdown of how the five master trusts compare.
Patrick Connolly, certified financial planner at Chase de Vere, says: “Traditional lifestyle fund approaches can fall short where people retire at different ages, go into phased retirement or want to use the pension freedoms and take their pension benefits in different ways rather than just buying an annuity.
“Younger pension investors can afford a higher degree of investment risk in the hope of better returns.
“The bigger challenge comes as people get older, because the right strategy will depend on how and when they take their pension benefits.
"Your pension provider might have limited investment options, other funds could be more expensive and, of course, you might make the wrong choices, which would impact on the size of your pension fund.”
NEST is the veritable goliath of master trusts. Set up by the government to lead the charge on auto-enrolling the workforce, more than 90% of NEST’s 6.7 million members are auto-enrolled. This accounts for well over half of all the UK’s workers who are auto-enrolled in a pension scheme.
The master trust’s investment strategy aims to be easy to follow, with a selection of just five types of strategy to pick from: default growth, higher risk, ethical, lower growth, Sharia compliant and pre-retirement.
NEST says that despite this selection, 99% of its members are in the default fund option, The Nest 2040 Retirement Fund (note: the year in the fund name changes depending on your retirement date). The default growth fund offers an allocation of 80% growth assets including property and equities (shares in companies) and 20% bonds.
Paul Todd, NEST’s director of investment development and delivery, explains the master trust’s strategy: “Our starting point is: ‘How do we give our membership a very high-quality investment experience?’ That translates into making sure our members are getting access to all sorts of different risk and return opportunities throughout their savings career.
“The vast majority of our members are in the default strategy, over 99%, and we’re really pleased about that. This is where we think they should be, because this is where we pay the most attention, and where the investment approach can be the most sophisticated.”
NOW: Pensions, meanwhile, operates one investment strategy for its members; the Diversified Growth Fund. According to NOW:, the fund “adopts a multi-asset diversified strategy to deliver good expected returns in most economic scenarios”. In effect, this means the fund reflects a risk allocation equivalent to 60% equities and 40% bonds.
This master trust is the only one of the largest five to offer a single investment fund without alternative options. NOW: reasons that too much choice is confusing: “We believe this choice is more often than not inappropriate, dangerous, and passes an unwelcome responsibility across to scheme members.”
Legal & General
Legal & General’s master trust members are placed into its default L&G Multi Asset PMC Pn 3 fund. The fund has a relatively high allocation of bonds and gilts at over 46%.
L&G’s members have a choice of 16 other funds if the default option does not suit. These include cash, bonds, property, global equities and ethical options.
The People’s Pension
The People’s Pension is second only to NEST in member numbers. Like NEST, it also offers a selection of options. These include ethical and Sharia funds, high-risk 100% global equities, medium/high-risk 85% global equities, medium-risk 60% global equities, medium/low-risk pre-retirement, medium/low-risk annuity and low-risk cash.
Members are placed by default in its Global Investments Up To 85% Equities Fund. Of the master trusts listed here, this is perhaps the most aggressively allocated fund, with 85% dedicated to equities.
Standard Life has one of the oldest master trusts, launched in 1974 and long predating auto-enrolment.
What sets it apart from the other master trusts is the choice that members have; there are 18 different funds, which Standard Life says gives members a wide range of passive and active investment options across all major asset classes.
The master trust’s principal investment option, Standard Life Active Plus III Universal Strategic, has a mixture of assets that, like NOW, more or less equates in risk terms to 60% equities and 40% bonds.
“For most people, better options are available”
What if your pension doesn’t offer you the choice you need?
Always research the funds your pension provider offers to see if others suit your needs. Moneywise’s First 50 funds list for beginner investors is a good starting point for ideas.
However, some pensions just don’t offer enough options. Mr Long explains: “Sometimes this can be solved by transferring pensions to a self-invested pension plan (Sipp) – although if the workplace pension you are investing in is through your current employer, you must be careful not to turn off the valuable employer contributions that will be being paid in. Some pension providers will allow you to transfer part of the money you have built up into a Sipp as long as you leave some of your pension to keep receiving contributions.
“Whether you have an old workplace pension or one through your current employer, you should check any penalties to transfer.
Most modern plans do not have these, but it pays to be careful.”
If in doubt, discuss your options with an independent financial adviser (IFA).
Note: all figures correct as of 19 June 2018.
|Pension master trust provider||Employees enrolled||Number of employers||Assets managed||Default fund cumulative five-year return||Other funds members could switch to|
|Standard Life DC Master Trust (SLDCMT) and Stan Plan||229,000||16,241||£4.76 billion||34.80%||18|
|Legal & General WorkSave Master Trust and RAS Master Trust||770,000||86||£5.2 billion||47.90%||16|
|The People's Pension||4 million||80,000||£4 billion||53%||11(i)|
|NEST Pensions||6.7 million||630,000||£3 billion||66%||5|
|NOW: Pensions||1.7 million||32,000||£685 million||38.60%||0|
|(i) Three ready-made portfolios or eight fund choices. Source: Moneywise, June 2018.|
Warning for employees who ‘opt down’
The minimum amount employees pay under auto-enrolment is 3%, which rose from 1% in April 2018. This contribution will rise again to 5% from April 2019.
But Kate Smith, head of pensions at provider Aegon, warns employees that if they don’t meet these minimum contribution levels, their employer can refuse to add their own.
She explains: “In April, pension contributions trebled for employees and doubled for employers. Although for employees the contribution only increased to 3% of a band of earnings, this may prove unaffordable for some. Rather than stopping paying pension contributions altogether, some employees may want to continue paying contributions at the 1% level, with a view to increasing at a later date.
“In theory this is possible, but only if the employee approaches the employer and asks to do this. Employers and pension schemes are forbidden to promote this option. However, this comes with a note of caution. If employees pay less than the legal minimum pension contributions, the employer doesn’t have to pay any contributions at all, and the employee misses out. The employee is counted as an ‘opt-out’ and will be auto-enrolled back into the pension scheme in three years’ time at the higher contribution rate.”
You should always research the funds your pension provider offers to see if there are others that suit your needs