What’s under the bonnet of your pension?

Your pension has an engine but most people are driving whatever they were handed without knowing what it was built to do.

Your existing engine may be well built but wrong for you, chosen without anyone asking what journey you wanted.

Two funds can chase the same market and finish miles apart. Here’s what to ask.

Ask most people what their pension is invested in and you’ll get a shrug. They know what it’s worth, but they’ve never looked under the bonnet at the engine doing the work. And the industry is happy to leave it that way.

We wouldn’t accept that with a car. A Toyota engine can do a quarter of a million miles and sip fuel; a Ferrari can drain the tank before lunch. Different engineering, different result. Your pension has an engine too, but most people are driving whatever they were handed without knowing what it was built to do.

In an employer scheme, the odds are you’re in the default lifestyle strategy. That isn’t one fund but a glide path, putting you in growth funds early before gradually moving you through balanced and cautious funds towards cash as retirement approaches.

In many Irish schemes, that journey uses a narrow range of actively managed multi-asset funds, with the charges that go with them. You didn’t choose it. Someone else chose it for the average member, not for you.

Here’s the cost. Many Irish lifestyle defaults have returned around 7% a year over the past decade. Over the same period, the S&P 500 returned roughly 15.3% and the MSCI World about 13.2%. Over fifty years, the S&P 500 still averaged about 11.9%. That isn’t a hot streak. It’s one of the world’s most widely followed indices, and for good reason.

That isn’t a like-for-like comparison. A lifestyle default is a lower-risk mix of shares, bonds and cash that gradually moves you out of growth assets as retirement approaches. The S&P 500 is pure US equity, while the MSCI World is developed-market equity. Both can fall much harder.

But that’s the point. Your existing engine may be well built but wrong for you, chosen without anyone asking what journey you wanted.

First question: are you in the right kind of engine? Second: even if you are, have you got the best version? Two investments giving exposure to the same asset can still finish miles apart.

Take gold. Gold is gold, you would think. Yet two options I recently compared returned around 10% and 12% a year over a decade, despite both giving exposure to the same metal. One was physically backed and held the gold. The other used futures, which must be replaced and can lose ground through roll costs and charges. Same asset, different engine.

Across global equity, US equity, emerging markets and many bond categories, the majority of active managers fail to beat a low-cost index over ten or fifteen years after fees. The longer the run, the worse the numbers tend to get.

That’s not my hunch. The SPIVA scorecards from S&P Dow Jones Indices show it year after year. Even among funds that beat the index, picking them in advance is difficult because strong performance rarely persists.

So when a fund sells you its clever manager, ask to see the scoreboard. Against the appropriate index. Net of fees. Over ten years. It usually won’t be easy reading.

If you’ve lost a bit of faith in equity and bond markets, and plenty quietly have, gold has a real case as a hedge. It won’t rise in every wobble, but it has earned its keep through major crises. Physical gold is the asset itself, not a company or government promise to pay.

But the real sting is choice. Most employer pensions do not offer a gold fund at all. Where one is available, it is generally the only option, so you cannot replace it within the scheme. Open architecture means a wider forecourt instead of one showroom, letting you compare managers, structures and costs before choosing.

What might that look like? For argument’s sake: 40% in a world index, 30% in the S&P 500, 15% in emerging markets and 15% in gold, using low-cost funds from Vanguard or BlackRock.

Yes, it leans hard on America, deliberately, because that’s where the strongest returns have been over recent decades. You can argue the toss. But over almost any sensible long-term stretch, a portfolio like that has left the typical lifestyle default and narrow domestic fund ranges well behind.

Be straight about the trade-off, mind. That portfolio is 85% equities and can fall further than a cautious fund in a bad year. Anyone promising big returns and a gentle ride in one breath is codding you.

Historically, long-run compounding has rewarded investors with the timeframe and stomach to stay invested. In nearly two decades, no employer lifestyle default I’ve reviewed has held a candle to a portfolio like that over the long term.

Near retirement and want something defensive? The same question applies: how much choice do you have?

Buy a car in Ireland and you pay VRT, duty, the lot. There’s no equivalent penalty for choosing a pension fund run by a major international manager.

Past performance is no guarantee, but it matters when comparing like with like. If a fund has a longer record and, after fees, has delivered more growth or lost less in downturns, why exclude it? There may be a good reason. But “it wasn’t on your employer’s menu or within the limited range your adviser could offer” isn’t one.

None of this is a recommendation to buy a particular fund or hold those exact weightings. What suits you depends on your age, timeframe and ability to withstand a fall.

But two questions apply to everybody: am I in the right kind of engine, and is it the best-built, best-value version available to me?

Lift the bonnet. If nobody can explain what you’re driving in plain English, keep asking.

Conor O’Shaughnessy is a Certified Financial Planner with Elevate Financial Planning.