Sitting on a goldmine

In the UK, the typical individual is expected to hold nine different jobs throughout their career, changing roles approximately every five years (1). However, this trend is set to evolve, with millennials anticipated to have around 15 jobs, and Gen Z employees averaging just 1.7 years in each position. (2)

The increase in the employment merry-go-round has coincided with a significant rise in unclaimed, inactive, or lost pensions, which have ballooned by £4.4 billion since 2022, now totalling an estimated £31 billion in dormant assets, according to the Pensions Policy Institute.

The increase in unclaimed pensions can largely be linked to the introduction of pension auto-enrolment in 2012, which placed the responsibility on employees to opt-out of joining pension schemes, leading to a surge in pension participation. Many workers find themselves enrolled in pension plans simply due to the path of least resistance. This trend is evident in a survey of 900 employees, which revealed that 80% were unaware of the amount in their pension pots, and a staggering 91% did not know how their funds were invested.(3)

It was estimated that by 2019, £53 billion was contributed to defined contribution pensions, with £43 billion, representing 8 million employees, allocated to default funds. This raises concerns among pension professionals who argue that a single default fund cannot adequately serve the diverse needs of such a large group. (3)

Default fund

Typically referred to as ‘Lifestyle’ funds, default pension schemes have in recent years also been rebranded as ‘Retirement Strategy’ funds. These funds are designed to adjust risk based on age and proximity to retirement, beginning with higher-risk equity investments in the early years and gradually shifting to lower-risk options like cash and gilts as retirement approaches.

When lifestyle funds gained popularity in the 1990s, they were suitable for a time when most individuals retired upon reaching their state pension age and converted their pensions into annuities, necessitating the need to protect the value in later years. However, the introduction of pension freedoms in 2015 has drastically altered the landscape, leading us to believe that these funds are no longer adequately serving their purpose for several reasons:

• The option to take an annuity is no longer mandatory, allowing pensions to remain invested for potentially over 20 years, which means missing out on significant growth opportunities.
• Funds are automatically switched at set times, regardless of market conditions. For instance, if your 60th birthday fell on March 13, 2020, during the Covid outbreak, you might have sold equities following a 10.8% drop in the FTSE 100.
• Fully investing in equities does not allow for the strategic purchase of additional equities when markets are low, resulting in a volatile investment experience.
• Default funds may not align with your values, potentially investing in companies involved in arms, tobacco, or gambling industries.
• Lower-risk investments, such as cash, may yield returns below inflation, eroding the purchasing power of your pension savings.

The same study indicated that employees who actively chose their investment funds saw a 39% improvement compared to those who opted for default options. While this figure is noteworthy, at Equilibrium, we advocate for avoiding unnecessary risk. Each client’s financial journey is unique, and if there’s no need to engage in high-risk investments, then why take that risk?

Understanding your financial goals and effectively combining your total assets and income sources is crucial for achieving financial confidence. If you have old pensions that you or your family have overlooked, we urge you to take a closer look, as they could significantly influence how happy you or your loved ones are in retirement.

If you suspect you have dormant pensions and lack information, consider using the pension tracing service at https://www.gov.uk/find-pension-contact-details.

Alternatively, if you would like us to review any of your existing pension plans, please contact us here or reach out to your usual Equilibrium contact.

Past performance is for illustrative purposes only and cannot be guaranteed to apply in the future. Investments will fall as well as rise.

This article is intended as an information piece and does not constitute a solicitation of investment advice.

Sources

(1) standout-cv.com

(2) peoplemanagement.co.uk

(3) dectech.co.uk