Prince Charles, it seems, is no fan of the pensions industry. Looking at the performance of a lot of the funds, you can see why.
Damning evidence, compiled by financial advice firm Bestinvest, names and shames the pension funds that have significantly and consistently disappointed. The “Spot the Dog Pension Edition” highlights those that have underperformed their benchmark, or peer group, by at least 10 per cent over three consecutive 12-month periods. Sadly, even with these filters in place, Bestinvest identified 113 pension funds, with combined assets of approximately £31bn, that have been serial underachievers.
David Smith, wealth management director at Bestinvest, says: “The number shocked us – £31bn in underperforming funds – and we have only scratched the surface. We hope that this will concentrate minds and persuade people that now is the time to review their pensions”.
“Consolidators” such as Friends Life and Phoenix, which have taken on funds from other insurers, are the main culprits. Friends Life had 23 funds in the doghouse, including the FL Reserve AP2, which returned 17 per cent less than the relevant Association of British Insurers (ABI) sector. This equates to a £97.90 return on a £100 investment over the three years, compared with the benchmark of £117.82 over the same period.
Skandia and Phoenix didn’t fare much better with 15 dog funds apiece, including Skandia Neptune Global Equity losing out to the benchmark by 24 per cent, while various funds from Scottish Widows featured 14 times. Other household names on the list are Prudential and Legal & General with seven poor-performing funds each.
Colin Tipping, group investment director at Friends Life, said: “Friends Life takes the oversight and governance of the funds that our customers invest in very seriously and we devote significant resource to this activity. Funds are monitored and governed to a strict set of criteria, and where a fund breaches that criteria, it is placed on a watch list with the aim of the fund manager resolving any performance issues”.
The obvious defence for individual fund managers is that they take a long-term view on markets, but Bestinvest has helped here too, labelling the “long-term laggards” that have delivered the very worst returns over 10 years. Once again Friends Life and Phoenix have been found wanting, but Abbey Life and Windsor also run several funds that have returned at least 20 per cent under the ABI sector averages.
To make matters worse, these pensions are all actively managed, which means investors are paying much higher charges for the service of supposedly skilled managers. Passive funds are cheap because they simply follow particular indices, rather than try to beat them. Many tracker funds are free to set up and cost less than 1 per cent a year to manage, compared with initial costs of 5 per cent with active funds and ongoing annual fees of at least 1.5 per cent.
Don’t assume you’re out of the woods if your fund doesn’t feature in the Bestinvest doghouse ; these funds represent the worst of the worst, so your money could still be stuck in pedestrian funds.
However, while you shouldn’t sit back quietly while your retirement plan suffers, there is a risk you could leave one fund that is just about to turn a corner and move into another that has already peaked. “It is often difficult for people to know what they should compare with what. A particular index might not be relevant if their fund invests in different areas, and even funds in the same sector might not be a good comparison if they take significantly more or less risk,” says Patrick Connolly of independent financial adviser (IFA) Chase de Vere.
Start by asking your pension provider for details of the past performance of funds in which you are invested. You also need details of all the charges in case you’re facing the double whammy of an underperforming and high-cost pension. There is a lot of information online and you can get more help from IFAs.
If you do believe your fund is underperforming, it isn’t necessarily the case that you should get out. Transferring to a different provider can be a minefield in terms of exit penalties, or losing valuable benefits, bonuses or guarantees. If you are near retirement, you may not have time to recoup the costs, even if you do switch to a better-performing fund.
Many pension policies now offer a range of investment choices, so you could find a better place for your money without having to transfer.
“Only look to move elsewhere if your current pension has no suitable options or if you are paying much higher charges where you are,” says Mr Connolly.
You could also consider consolidating your pensions into a single plan, or self-invested personal pension (Sipp), to choose from a wide range of investments. Sipps are not suitable for everyone, but if you are happy to take a more active role in your pension planning, they can be a great way to take control back.
Experts advise reviewing your pension investments every six or 12 months. If you have a long time until retirement, you can take more investment risk because you would be able to make up any short-term losses.Reuse content