Striking differences found on investment pathways funds – LCP

Mark Battersby reports

Retirees who are shunning annuities face a huge variety of product options, charges and investment performance when going down the “investment pathway” route which they need to consider carefully, according to research from consultants LCP.

The regulator has become increasingly concerned about this non-advised group, in particular, the risk of people ‘sleepwalking’ into having the money sitting in cash, which has resulted in pension providers having to steer investors down ‘investment pathways’ since 1 February 2021. 

Savers answer a simple question about what they plan to do with their money and the provider then offers a drawdown fund that they think best matches the investor’s intentions.

Research from pension consultant LCP showed charges on investment pathway funds were proving to be relatively modest. However, it also found that there is still substantial variation in charges between providers and also that the types of product being offered vary considerably, even for people on a single so-called ‘pathway’.

As a result, they are urging savers to “look under the bonnet” of the different products they are being offered and think carefully before selecting the right one for them.

LCP partner Dan Mikulskis said: “Freedom to choose what to do with your pension pot is a good thing, but too many people are at risk of getting poor outcomes. The new ‘investment pathways’ are welcome where they have helped to put downward pressure on charges, and could help steer consumers towards the right product.

“But our research has shown that different providers vary hugely both in what they will charge and in the product they will offer to the same individual. Savers need to look under the bonnet to see how their money will be invested before they choose where to save, and they need to avoid the risk of investing too cautiously given that retirement can easily last for several decades.”

Key findings in the research, which focused on the main investment pathway for those going into drawdown (known as Pathway 3) included:

  • Of the eight providers listed on the Money and Pensions Service comparison site in February 2021, the average charge quoted for a £100,000 pot was 0.64% in year one.
  • Charges varied considerably from provider to provider, with the cheapest charging 0.39% (Aviva) and most expensive 0.93% (Pension Bee)

LCP also found that pension providers were given considerable freedom by the Financial Conduct Authority in what product they offer to match each investment pathway.  The investment mix can vary greatly from provider to provider, with the share invested in equities ranging from 20% (Pension Bee) to 53% (Hargreaves Lansdown).

Looking at past performance of these funds, LCP found:

  • Of the four providers where three-year performance was available, this ranged from 1.7% per annum to 4.6% per annum.
  • Comparative tracker funds would have returned 4% to 5% per annum over that period.

Pension Bee has challenged the accuracy of LCP’s figures. It said its charges on pathway plans range from 0.50% to 0.95% depending on the option chosen.

It’s plans are called ‘tracker’, ‘pre-annuity’, ‘4-plus’ and ‘preserve’. The company also said its equity holding in the 4Plus Plan was 60% (53% developed equity and 7% emerging equity). “The allocation changes weekly because it is an actively managed product,” a spokesperson said.

PensionBee chief executive Romi Savova previously wrote to MAPS expressing her view that the pathway tool on its website was impossible to use and understand.