Each month, a portion of our salaries is deducted and contributed to a pension fund. Many people may overlook this process until they receive their annual pension statement in the mail.

“I’m saving,” one might think. “I have a plan for my future.”

But is that true?

In just four days, Rachel Reeves will deliver her inaugural Mansion House speech as chancellor, during which she is anticipated to discuss the need for pension funds to invest more in domestic companies. She is expected to address initiatives announced by Jeremy Hunt last year, including commitments from 11 of the UK’s largest defined contribution pension providers to allocate 5 percent of their default funds to unlisted assets by 2030.

This investment could significantly benefit UK businesses. Defined contribution schemes, which determine retirement income based on contributions and investment returns, represent a large portion of workplace pension plans. Most savings in these schemes are directed into default funds, which typically do not include unlisted assets that are not traded on the stock market and can be riskier.

It is no surprise that policymakers are focusing on pensions, as the UK has the largest pension market in Europe, valued at over £2.5 trillion. With recent budget constraints and limited contingency funding for unexpected expenditures, the government seeks to leverage pension funds to meet its goals.

However, it is vital to remember that these funds are composed of individual savings.

Thanks to auto-enrolment, most private-sector employees are now contributing to defined contribution pensions. The process is straightforward: when starting a job, 5 percent of your salary is automatically invested into a pension, with employers contributing at least 3 percent.

This seamless system can lead many to forget that their contributions are being invested, highlighting the need for greater scrutiny over how these investments are managed.

Oftentimes, individuals find their savings placed in their pension provider’s default fund—a preselected investment option with nearly 90 percent of defined contribution savers relying on it, according to the Pensions and Lifetime Savings Association.

Unfortunately, many are unaware of the significant risks associated with these default funds. The uniformity of a default fund fails to take into account the varying risk appetites and circumstances of individual investors.

Moreover, default funds might be too conservative. For instance, the default fund for a 30-year-old planning for retirement with The People’s Pension contains about 20 percent in government and corporate bonds. This is not ideal as individuals at this stage should primarily invest in equities. Allocating a significant portion of funds to low-risk investments could hinder retirement savings growth by missing out on potentially higher-yielding shares.

Additionally, many default funds employ a ‘lifestyle’ strategy that automatically reallocates funds to lower-risk investments as the retirement date approaches. However, with increasing life expectancies leading to longer working lives, this strategy may be implemented too early, adversely affecting overall savings. This setup may also conflict with withdrawal strategies such as drawdown, where retirees take funds as needed.

Being enrolled in a default fund does not equate to choosing a specific market or asset-focused fund; the only commonality among default funds is the label itself. Performance varies widely: while some default funds have performed well, others have not met expectations.

For example, Legal & General, the third-largest pension default fund, has reported a return of 6.83 percent over the past five years, while Aviva has achieved a 10 percent return in the same period, illustrating that default fund performances can differ significantly.

According to research from Corporate Adviser, the performance of default funds has ranged from 5.1 percent to 12.9 percent in the last five years.

An individual on a starting salary of £25,000 contributing the auto-enrolment minimum of 8 percent to their pension could expect to accumulate £122,185 after 30 years at a growth rate of 5.1 percent annually after fees, factoring in 2 percent inflation and 4 percent wage growth. Conversely, if the pension pot grows at 12.9 percent per year, it could reach £465,841—nearly four times more.

While auto-enrolment has successfully increased pension participation, it is crucial not to overlook the importance of selecting an appropriate fund that aligns with personal financial goals.