AJ Bell compared the funds’ performance to the iShares UK Equity Index, a tracker fund with an annual charge of 0.05%. It found that 72% of UK pension funds underperformed the tracker by more than 10% over 10 years; 37% underperformed by more than 20%.
A retiree receiving a 6% net return on a £50,000 pension pot for 20 years will end up with £167,357, AJ Bell said – but a 4% net return reduced the pot to just £109,556.
The administrator explained that many pension funds were set up decades ago when tracker funds were not widely available in the UK and “there wasn’t a great deal of appetite from pension providers for investing too differently from the market”. The result was a “horde of closet tracker funds sold to pension savers which largely follow the index, but charge fees in line with active funds”.
Index performance minus high fees leads to negative outcomes for savers, it added.
AJ Bell head of investment analysis Laith Khalaf called the findings “pretty shocking”, adding: “The magnitude of some of the underperformance is equally concerning.”
He noted that the underperformance “has seriously damaging effects in the real world because of the impact on the size of savers’ pension funds when they retire”.
Khalef added that while many older pension funds are closed to new business, the Financial Conduct Authority’s Consumer Duty will apply to them from July, potentially driving improvements for investors.
