Why Apple is at the core of auto- enrolment pensions

There is good news for the 4.5 million workers who have started paying part of their salary into a pension for the first time under the government’s “auto-enrolment” regime. Many have enjoyed gains of around 25% on the money they have so far paid in – with a “sharia” fund among the surprise best performers.

It was two years ago this week that the government brought in automatic enrolment – a huge shake-up of retirement saving that has resulted in millions more people paying into a workplace pension. Many companies have put their workers into Nest (National Employment Savings Trust), the scheme set up by ministers as part of the changes, including workers at big-name firms such as BT and fast food giant McDonald’s. Millions more will join them over the next few years.

So far Britain’s workers have poured £226m into Nest, and with global stock markets recovering from the financial crash, the funds have performed healthily. Workers are allocated a fund – but are free to choose alternatives, such as an ethical or sharia-compliant one.

Guardian Money was keen to find out how the Nest funds have been faring. The sharia fund has turned in one of the strongest performances, making a 29% gain since October 2012, and the ethical fund has given a decent return, too, with a gain of 25%. The mainstream funds have typically earned around 24% – which compares well at a time when cash Isas are paying out just 1-2% a year.

But Nest members had better cross their fingers and hope that technology giant Apple can keep delivering and isn’t laid low by alleged problems with “bendy” iPhone 6s, this week’s news of a potentially huge tax bill related to its operations in Ireland, or any other calamity. That’s because, with some of the Nest funds, as much as £1 in every £16 of retirement cash is invested in Apple shares.

Described at the time as the biggest change to UK pensions for over 100 years, automatic enrolment went live on 1 October, 2012. It requires all employers to automatically enrol eligible workers into a workplace pension where both the employee and their company pay in. The regime is being phased in, so that eventually it will include people who employ just one person.

Two years on, the number of people who have been auto-enrolled stands at close to 4.5 million. Eventually, it will be up to 11 million, though it is worth remembering that for millions of people, nothing is changing. If you are already in a pension at work and it meets the government’s new standards, this shake-up does not affect you.

Well over a third of the workers who have been signed up so far, are paying into the Nest scheme, though there are several other auto-enrolment pension providers out there, including NOW: Pensions and The People’s Pension.

When a worker joins Nest, their money is automatically invested in one of its 47 “retirement date funds”. You are put into the one seen as most suitable for your age, and the money is usually spread across different types of investment … shares, bonds, property.

However, it also offers a range of other options including the sharia and ethical funds, plus a “higher risk fund” for people prepared to take a bit more investment risk, and a “lower growth fund” for those who are very cautious.

Nest’s figures show the cumulative investment return over the 23 months from 1 October, 2012 to the end of August this year (ie, if you put £1 in on 1 October, 2012, what it would be worth now). If, say, you are around 59, you are probably in the 2021 retirement date fund, which has delivered a return of 19.8%. The 2055 retirement date fund – broadly for those aged around 27 – has provided an almost identical return. For those in between those ages, the returns delivered by the retirement date funds are more like 23-24%.

If you had decided to put your money in Nest’s ethical fund, you may be pleased to learn that it has notched up a return of up to 25%. This fund is aimed at workers concerned about issues such as human rights, fair labour practices and the environment.

Nest’s sharia fund – open to anyone, not just Muslims – has produced a 29% return over the period. This invests in the HSBC Life Amanah Pension Fund, which, in turn, mirrors the Dow Jones Islamic Market Titans 100 index, made up of the top 100 sharia-compliant global stocks by size. The Nest sharia fund avoids companies involved in alcohol, tobacco, financial services, pornography, weapons, pork, gambling and leisure/media – which may mean that, in some people’s eyes, this effectively counts as an ethical fund.

So which companies make the grade? The list of the Nest sharia fund’s top 10 biggest shareholdings is topped by Apple. Typically, 6.2% of all the cash going into the fund is being invested in the iPhone and iPad maker, with oil giant Exxon Mobil in second place (4.8%), and Google and Microsoft third and fourth (3.7% and 3.5% respectively). Also in there are pharmaceutical giants such as Pfizer and Novartis.

Most, if not all, of the Nest funds are big backers of Apple – for example, in the case of the ethical fund, 3.3% of all the money going into shares is being invested in the tech behemoth, making it the number one equity holding. Apple is also the top holding in Nest’s higher risk fund, which is aimed at workers willing to take more investment risk in order to seek higher returns, and was the only fund to beat the sharia fund on performance over the period, with a 30% return.

By contrast, some of those who signed up for Nest’s lower growth fund – designed for employees “who want to take as little investment risk as possible” – might be regretting their decision after it emerged that it has delivered a cumulative investment return of just 0.82%.

Not all of the money workers pay in to Nest goes into shares. Typically, the retirement-date funds have only around 45-50%, with the rest in government and corporate bonds and property.

As to why Apple seems to be such a popular holding, Nest says this is to do with the underlying investment funds it uses, one of which is a global equities tracker. “We just have the index weighting in Apple shares. It’s not a statement one way or another about Apple – it’s just that they are one of the largest market cap companies in the world.”

What have you got two years on?

If someone was auto-enrolled two years ago, how much might they actually have in their pension pot now?

Here are the figures for three Nest members who were enrolled on 1 October, 2012; were put into their relevant retirement date fund; and have been paying in the minimum amounts.

Remember that contributions are going to go up – the total minimum is currently 2% of qualifying earnings (typically made up of 0.8% from the employee, 1% from the employer and 0.2% in tax relief from the government), rising to 5% in October 2017 and then 8% in October 2018.

Bear in mind these percentages don’t apply to all of an individual worker’s salary, but only to what they earn over the minimum amount – currently £5,772.

Age 25, earning £20,000 He or she would have a pot worth £587.80 as at 30 August, 2014, made up of: employer contribution £274.90 + employee contribution £219.90 + £55 tax relief + £37.90 investment growth (net of 1.8% contribution charge and 0.3% annual management charge). Return on gross contributions: 7%.

Age 30, earning £26,000 He or she would have a pot worth £847.50 as at 30 August 2014, made up of: employer contribution £389.90 + employee contribution £311.90 + £78 tax relief + £67.60 investment growth (net of charges as above). Return: 9%.

Age 40, earning £30,000 He or she would have a pot worth £1,015.50 as at 30 August, 2014, made up of: employer contribution £466.60 + employee contribution £373.30 + £93.40 tax relief + £82.20 investment growth (net of charges as above). Return: 9%.

Nest says the reason the overall investment return on total contributions across the period is 7% or 9%, as opposed to the higher figures quoted (left), is because the contributions are added in over time, rather than all having been put in on 1 October, 2012.

* These figures assume the worker pays the minimum contributions on “qualifying earnings”. The qualifying earnings bands over the period rose from £5,564 in April 2012 to £5,668 in April 2013 and £5,772 in April 2014, so this means the contributions are calculated based on total salary minus those amounts.