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Many employees are losing out financially by selecting the default fund options on their workplace pension, according to new research by Hargreaves Lansdown.

The research shows that these default options underperformed the most popular funds actively selected by workers – or their advisers – by 4.89 per cent a year, over the past five years.

One of the main reasons for this underperformance was the fact that most default funds are multi-asset vehicles, which typically have just 65 per cent of assets invested in equities.

This has led to more pronounced underperformance recently, with many global stock markets doubling in value over the past five years.

The Hargreaves analysis looked at the choices of almost 12,000 active members of workplace pension schemes. It compared the average performance of the 10 funds most widely selected, with the average returns of the default funds from nine large workplace pension providers – including Hargreaves Lansdown.

Over the past three years the average top 10 fund produced a return of 13.51 per cent, compared to the average default fund returning 9.35 per cent.

Over five years the average top 10 fund produced a return of 14.26 per cent, compared to a 9.38 per cent return on the average default fund – a difference of 4.89 per cent a year.

Hargreaves Lansdown said it was not releasing which were the most popular funds selected.

The research also shows that those who have larger pension funds, or have been scheme members for longer are more likely to make their own investment decisions.

For example, three out of four scheme members who have a pension fund of over £250,000 are more actively engaged in investment decisions, compared to around  30 per cent of those with assets of between £10,000 and £30,000.

More than 45 per cent of those who have been a pension member for between five and 10 years will exercise an active choice over their investments. This compares to just over 10 per cent of those who have been a member for less than a year.

Hargreaves Lansdown’s senior pension analyst Nathan Long says: “Default funds are a necessary element of auto-enrolment pensions, but by their nature they are designed as a one-size-fits-all solution, and are generally more conservatively managed. For most people better investment options are available.”

He adds: “This data suggests consolidating pension plans and making the management of these investments easier can boost engagement levels.”

Long says this supports calls from within the industry for employees to be allowed to choose which service they want their auto-enrolment contributions to be paid into, with default options for those that do not want to make this choice.

He says most people are looking to boost pension provision, but if it comes to a choice of paying-in more, working longer or getting a better return on their money, most employees would opt for the latter.

“Our research shows that those actively engaging with their pension options are achieving better returns.”

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