More than nine in 10 (91 per cent) pension funds in the UK have underperformed a FTSE All Share tracker over the past 10 years, according to analysis from AJ Bell.

The 10-year total return of the iShares UK Equity Index was 73.7 per cent, as at 30 April 2024, according to data from Morningstar.

Following its analysis of UK pension funds, AJ Bell found that 72 per cent had underperformed the tracker by more than 10 per cent over the past 10 years.

Furthermore, 37 per cent had underperformed the tracker by more than 20 per cent over the decade.

AJ Bell head of investment analysis, Laith Khalaf, described the findings as “pretty shocking” and said that the magnitude of some of the underperformance was “equally concerning".

“This doesn’t look like a market which is serving consumers well, and yet 10s of billions of pounds are invested in pension funds posting disappointing performance,” he stated.

“This has seriously damaging effects in the real world because of the impact on the size of savers’ pension funds when they retire.

“Returns from the UK stock market itself haven’t been great over the last decade, but funds which have fallen significantly behind a tracker add insult to injury.”

Khalaf said there were a number of factors that can lead to poor pension fund performance, noting that many pension funds were set up decades ago when there was not a great deal of appetite from providers for investing differently in the market.

Additionally, as tracker funds were not widely available in the UK, a “horde” of closet tracker funds were sold to pension savers that largely follow the index, but charge fees in line with active funds.

“Index performance minus high fees is an equation which leads to negative outcomes for pension savers,” he said, continuing: “The deep irony is some of these funds have hundreds of millions of pounds if not billions invested in them, and many aspiring active managers who are genuinely trying to beat the market through stock selection would give their eye teeth to run funds of such size.

“Charges for older pension plans often therefore look high by modern standards, because they were set a long time ago before investment and platform costs started to fall.

“Many older pension funds are now closed to new business. A cynical interpretation of poorly performing funds would be that providers aren’t too interested in bringing them up to speed, choosing instead to invest resources in products they are still selling in the present day, and relying on pension savers not realising their funds aren’t doing too well to keep the older funds ticking along generating fees. From this viewpoint, poor performance is effectively an inertia tax.

“The Financial Conduct Authority's Consumer Duty regulation will apply to closed books from July, which should in theory help drive improvements for investors in closed pension funds.”

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