Bold claim first: your pension choices can make the difference between retiring as a millionaire and ending up with a tiny amount. But here’s where it gets controversial... different fund choices can dramatically alter your future, and sometimes the impact is shocking enough to spark debate.
A recent analysis from Investing Insiders examined nearly 13,000 pension funds to rank performance across risk levels—high, medium, and low—and to illustrate how a simple “select and forget” tactic could backfire. The takeaway is clear: diversification matters, and failing to monitor your allocations could either shrink your pot or wipe it out entirely.
What the study did
- It compared hypothetical scenarios where all money is placed in a single fund rather than spread across multiple options. This extreme setup helps highlight how much of a difference a single fund’s performance can make over time.
- In one example, Person A saved £50,000 in the best-performing fund (Aviva Ninety One Global Gold Pension) in December 2020 and, over five years, earned a 180.28% return, growing the pot to £140,140.
- In the opposite scenario, Person B placed £50,000 in the worst-performing fund (Zurich JPM Emerging Europe Equity), which lost 98.59% over five years, leaving just £705.
- If those trajectories continued for another two decades, Person A’s pot could top £3 million, while Person B’s would remain a fraction of a penny. These figures account for fund fees but exclude investment platform charges.
Key takeaways
- Both funds highlighted are high risk, illustrating how a portfolio’s risk level can align with potential outcomes. Sustained performance over 20 years can yield multi-million growth on the high end or near-total wipeout on the other.
- The scenario is extreme and not typical of default pension schemes, which usually diversify across many asset types. Still, it underscores the importance of diversification and ongoing oversight: if one fund goes wrong, the consequences can be severe.
Fund-specific notes
- Zurich UK’s Emerging Europe Equity fund is a self-selected option—not a default pension fund—and it was suspended in February 2022 after sanctions tied to Russia’s invasion of Ukraine. Zurich UK stated the fund contains sanctioned assets, leading to very low value and returns.
- In medium-risk analyses with 20 years of data, £50,000 invested in the Zurich American Select fund in 2005 would have grown to £477,525 (an 855% increase). By contrast, £50,000 invested in Clerical Medical UK Equity would yield £92,835 (an 85.67% gain).
Industry perspective
- The head of investments at Aviva, Donato Boccardi, noted that default investment strategies (which are designed to do the heavy lifting automatically) are essential but that small active adjustments—such as increasing contributions—can significantly impact outcomes.
- Financial regulators have flagged that many savers auto-enrolled into workplace pension schemes may have mismatches relative to their needs. The Financial Conduct Authority has urged schemes to publish transparent data on performance, costs, and service quality.
Practical guidance for savers
- Stay engaged with your retirement savings. Default strategies work, but they aren’t one-size-fits-all. If your scheme is underperforming on a relative basis, compare it to industry benchmarks and consider rebalancing.
- Consolidate if you have multiple old workplace pensions to avoid stacking fees from several plans.
- Most schemes offer various investing options. If the default is too conservative for your time horizon, explore other choices that better align with your risk tolerance and retirement goals.
- Don’t chase the hottest fund. Long-term investing wins with a steady, well-diversified approach. Constantly hopping between funds can erode gains through fees and poor timing.
Discussion questions
- Should default schemes be more customizable by age or life stage, even if that means more involvement from savers? Why or why not?
- Are the potential gains from active adjustments worth the added complexity and effort for most people?
- How should regulators balance simplicity for everyday savers with the need for personalized, transparent investment options?
All graphs referenced were provided by Investing Insiders.
