Even a modest improvement in pension investment performance could dramatically increase retirement savings, with a 1% rise in annual returns potentially adding more than £150,000 to a worker’s pension pot over the course of their career, suggests new research from Smart Pension.

According to analysis based on five-year annualised performance data from 21 pension providers, a typical 25-year-old worker earning £30,000 a year, starting with a pension pot of £1,000 and saving until retirement at 65, could accumulate an additional £150,000 if their pension achieved returns just 1% higher annually.

The findings come as pressure grows on employers and employees struggling to raise pension contribution levels amid continued cost-of-living pressures and economic uncertainty. Smart Pension, which exceeds £9.5bn in assets under management (AUM) and serves over 1.5 million members, is urging the pensions industry and policymakers to place greater emphasis on net investment returns and to accelerate adoption of the new Value for Money (VfM) framework introduced under the UK’s Pension Schemes Act.

The research also warned that workers moving away from workplace pension schemes could risk poorer outcomes. It found that a 35-year-old saver with a £10,000 pension pot who switched from a workplace scheme to an alternative retail provider with a medium-risk investment strategy could end up more than £165,000 worse off by retirement.

The company argued that the new VfM framework has the potential to improve transparency and make it easier for employers, advisers and savers to compare pension schemes based on long-term value rather than simply costs and charges. Smart Pension is calling for the framework to be adopted across the entire defined contribution market, including retail pension providers, by 2028.

The research also adds to the growing debate around pension reform in the UK as the government and industry examine ways to improve long-term retirement outcomes without placing additional contribution burdens on workers and employers.

Jamie Fiveash, CEO of Smart UK, said the industry needs to prioritise retirement outcomes more effectively.

“We need a renewed focus on saver outcomes. Employees could stand to earn six figures more by being invested in a pension fund that performs just 1% better. At a time when businesses and employers are stretched for putting more away in savings, a renewed focus on net returns can make a massive difference,” he said.

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