Choosers beat defaulters in Hargreaves’ Corporate Vantage

Choose investmentWorkplace pension investors who opted out of their default fund have achieved higher returns over the last five years and can be expected to do so over the longer term says Hargreaves Lansdown.

Hargreaves says the top 10 funds picked by members of its Corporate Vantage workplace pension, who opted out of the default, returned on average 3.01 per cent a year more than the average managed fund over 5 years. Half of Hargreaves’ workplace pension scheme members opt out of the default fund.

The firm says 8 out of the top 10 funds chosen by members outperformed the average managed fund. It says this level of outperformance could enable someone with average earnings to increase their pot by £334,000, from £169,000 to £503,000 at retirement, presuming a 5 per cent return for the default and 0.5 per cent charges.

The view runs against the ‘choosers are losers’ school of thought that argues that those who make active choices tend to do lose out in the long run.

The figures cover a period of positive returns for equities, meaning traditional defaults and other balanced funds will have seen less strong returns. But Hargreaves senior pension analyst Nathan Long says greater returns can be expected by those who opt out of the default option because, over the long term, equity performance is expected to be greater.

Long says: “Members need to choose higher risk as opposed to having it thrust upon them by default.

“Financial education can help staff understand that they should save more, but also help them to make confident decisions to invest differently to the default fund.

“Default funds are a one-size fits all approach to investment, so quite simply cannot be right for everyone. Changing your investments to suit your own objectives and attitude to investing can generate superior returns and have your money put to work harder for you.

“Investing is not something to fear, with the right information and education, confident choices can be made that can provide more income in retirement, an earlier retirement or both.

“Six of the funds chosen were funds investing entirely in equities, compared to a c70 per cent equity content in the average managed fund, although two of the funds chosen were also in the mixed investment 40-85 per cent shares sector and two were more conservatively managed. So an element of this has been a rising market, but equally over the longer term we expect equities to deliver superior returns. So for members, particularly in the early years of their pension saving to actively choose to take more risk this should be to their advantage over the long term. We are not suggesting this will continue at this rate for ever, however even small levels of outperformance will drive higher pension funds.”