How to Evaluate Your Workplace Pension

Most people of working age will have a pension at work. We might know nothing about it, have no clue where it is, or even what’s in it - but the chances are we have one.

Auto-enrolment was a policy introduced in October 2012 by the very nice Sir Steve Webb, former pensions minister in the Conservative/Lib Dem coalition government. It mandated employers to pay a pension to most people, even if they are one-man bands hiring a nanny, or a small start-up with 5 staff on payroll. No matter how small, the law says that employers need to pay most workers a pension.

Today’s rules say that 3% of your salary comes from your employer, and 5% from you. No-one can force us to do this and opting out is your right. But if you opt out, you kiss goodbye to that 3% from your employer, so it’s to be avoided if at all possible.

These sums of money are adding up. Have a look in your pension from work – you might be pleasantly surprised. But at the same time, you might then start to worry about whether that money is in the right home. So here are some pointers on what to look for.

🔎 Where is your pension money invested? Asset allocation basics

The first question is this. Where is my pension money actually invested? It will almost inevitably be invested in a mix of cash-like things and shares. The younger you are, the more you have time on your side, and so anyone under 55 should have a very sizeable dollop in shares. If you’re under 40, you should be asking why if you have less than about 90% in shares, in my opinion. If you’re under 60, you would still expect to see a decent amount in shares. No point in limping along in cash too early.

📈 How to check your pension performance: 3-year vs 5-year returns

Look at the 3- and 5-year performance of your pension. Sometimes stock markets have bad years compared to cash, but they tend to bounce back. So don’t be too worried about 1-year numbers. The 5-year performance is important. If it’s worse than cash, you should want to know why. And I would expect to see average returns of around 5% a year over the long run. If not, you need understand why.

A very helpful thing to do is to look at how a mixed bag of shares has done over the same time. One proxy is what we call an index fund - something like the Fidelity Index World Fund. This is a mixed bag of the world’s 1,000-ish biggest companies and so is a rough guide as to what has happened in global markets. If that is up by 10% in a year but your pension is down by 5%, you’d expect a pretty convincing argument as to why! If however that is down by 5% and so is your pension, that all makes sense. It’s just a guide.

You also need to make sure you’re making a fair comparison. If you are nearing retirement and have a large amount in cash-like things, generally described as ‘bonds’ (less powerful than shares), then you shouldn’t expect the same returns (or falls) of the stock market, so dilute your expectations accordingly.

💰 Pension fees and charges: What you should expect to pay

The next thing is fees and charges. Warning: looking at the small print of pensions can fry your brain. Look on an annual statement or call up your pension firm. Ask for the total all-inclusive fee that you're paying. To include pensions, investments, admin and the kitchen sink. I would expect this to be anywhere from about 0.3% to about 0.7%. Any more, and I would want to know why. Any less, and I’d ask what they are not telling you! Generally, a pension through work will cost you less than one you set up yourself in a private capacity online.

🛎️ Evaluating pension provider service quality and user experience

Finally, you want to think about the service. How long does it take them to answer the phone? Is there a phone?!

Some providers will put you straight through to a knowledgeable human being. Others will force you down chat routes or leave you on hold for 45 minutes. What’s the app like? What do others say on App store reviews or Trustpilot? Some providers actually have quite helpful apps which no-one really downloads or uses. So check it out and see what you think. There is probably quite a lot of helpful information out there, it’s just quite dry.

If you really want to geek out on this stuff, you can search for the IGC (Independent Governance Committee) reports on value for money, but reader beware: these are quite heavy-going!

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