Older pensions may deliver poor value, study shows

If you've held several jobs during your career, there's a good chance you have one or more pensions that you are no longer actively contributing to. But are they performing as well as they could?

Some savers could miss out on thousands of pounds if they don't move older pensions to ones that offer better value for money, according to the Institute for Fiscal Studies (IFS).

Research carried out by the IFS, funded by the Economic and Social Research Council, has revealed that many people in their 50s hold their money in defined contribution (DC) schemes that have higher charges than commonly found in current pension schemes.

Charges have fallen over time and older pensions don't always reflect these changing market conditions.

The study found that the average annual fee for deferred pensions taken out in the 1990s is above 1.1% of fund value, compared with around 0.9% for pensions taken out in the 2000s and 0.8% for pensions taken out in the 2010s. Very few pensions taken out a long time ago have low charges: four-fifths of the pensions started in 2013 have a charge of 0.75% or less, compared with just one in four of the pensions started in 2003 and one in nine of those started in 1993.

Although the difference between 1.1% and 0.8% sounds small, it can make a considerable difference to retirement savings over time. For example, for a 50-year-old with a pension pot of £21,000 it would amount to a difference of around £2,400 at age 67 in today's prices if annual investment returns in the future are the same as the average over the past five years.

Having higher-than-average fees does not necessarily mean a pension scheme is not good value for money. However, in the sample analysed the IFS found that investment performance over the past five years is generally similar among schemes with higher charges and those with lower charges, showing that the higher average fees among older pensions are not always offset by better returns.

Another risk with older pensions is that the portfolio allocation may no longer be appropriate. This may be a particular issue for people approaching retirement, among whom the proportion of their pension funds invested in equities varies according to when their pension was started.

In the schemes included in the study, the share of funds invested in equities for DC pensions started in the last decade was on average 45% for those aged 60 compared with 66% for those aged 50, consistent with people moving away from risky assets in the run-up to retirement. But among pensions started in the 1980s and 1990s, there is no difference in the average equity allocation depending on people's current age; those aged 50 and 60 both have on average over 70% invested in equities. This suggests that for older savers, there is the risk that older pensions are inappropriately invested in riskier investments such as equities. Similarly, the investments made in older pensions may be less well matched to an individual's current risk preferences than those in pensions taken out more recently.

"It is vital that people get the most out of the retirement saving they have done over their working lives," said Kate Ogden, a research economist at IFS and one of the authors of the report.

"Many would benefit from taking active decisions over their past pensions, and this needs to be made easier to do. But greater individual engagement will never completely fix this issue, and policymakers need to consider wider initiatives to encourage value for money in older pensions."