Personal Finance: A no-shareholder pension? The benefits are mutual

A wise choice of personal pension can make a big difference to your income in retirement, and a mutual company may well offer the best deal, writes James Moore.

Looking to buy a personal pension? It is probably the most important financial commitment you can make - apart from a mortgage.

And, just as with mortgages, suggests evidence collected by the City watchdog the Personal Investment Authority (PIA), people get a better deal with mutual firms.

Mutuals have no shareholders, so have no need to pay dividends to them. Building societies are owned by their savers and borrowers; mutual insurers belong to their policyholders.

The theory is that, because they have no shareholders, mutual insurers should pay out more to policy-holders than their equivalent, shareholder- owned proprietary companies when a pension policy matures.

When the PIA looked at the performance of personal pensions sold by mutual and proprietary companies, it found that on average, this was true.

There are two main types of pension fund available: with profits, and unit-linked.

With-profits policies are the traditional method of sharing out investment profits, with a bonus added to the basic benefits of the policy every year. Some money is held over in good years to pay out in bad years, which smoothes out stock market ups and downs.

PIA figures show that the average estimated value of a 25-year pension plan into which pounds 60 per month had been paid is pounds 50,228 for the 10 mutuals surveyed. The 18 proprietaries managed just pounds 48,129 - 4.4 per cent less.

The figures are based on the PIA's assumption of 9 per cent growth each year. The difference comes in the charges levied by the companies.

Unit-linked policies are more variable and directly reflect the value of a pool of investments. Again, however, the figures, based on the same assumptions, show mutuals out-perform proprietaries, providing an average payout of 1.9 per cent higher, with pounds 49,562 compared with pounds 48,629.

The PIA bluntly puts mutuals' unit-linked policies' better performance down to "either a higher expected degree of efficiency, or lower profit margins".

Unsurprisingly, the PIA's research has not been well received by the proprietary companies. John Bowman, a director at Commercial Union Life, points out that the competitive personal pension market pushes down charges and improves margins for investors.

"It is wrong to say that just because you are a mutual you will do better ... and it is an over-simplification to look at mutuals and proprietaries like this. You have to look at companies on a case by case basis. We expect to compete with any mutual."

Norwich Union demutualised last year. Philip Scott, the group director of life and pensions, says: "Our fund is a mutual fund within Norwich Union, so there is no pay-out to shareholders from it. We make the money from charges. They don't all work like that. You have to look at individual companies."

But the mutuals say the figures confirm they are doing better. They may also make policyholders in mutual companies pause for thought before voting to convert in the hope of a payout, should the option be offered, as happened in the case of Nationwide Building Society when a proposal to demutualise put by rebel members was voted down.

"Proprietary companies have to pay part of their with-profits funds to shareholders. If mutuals are efficient and well run they should outperform them. We have no plans to list because we don't need to," says Tom King, group director at Standard Life.

But he does warn against automatically assuming that mutuals will be better: "It is not enough to be mutual. You have to be a well-run mutual company that has the capitalisation to invest in shares."

Nigel Webb, a senior manager at Equitable Life, which performed better than any other company in the PIA's survey, says: "We believe strongly that the benefits of a well-run mutual are very significant.

"If mutuals do run their business for the benefits of their members and focus on that, they have a very strong message to tell."

Whether mutual insurers will manage to remain mutual, and provide the type of benefits of which the PIA found evidence, remains to be seen.

Like football chairmen saying they have every confidence in managers before sacking them, mutuals tend to insist that they are happy with their status until they announce their intention to convert.

Some believe that whatever they say, when the global insurance market becomes a reality and competition hots up, mutuals will have to convert to release the capital they need in order to compete and expand.

Charles Thompson, Scottish Widows' operations and appointed actuary, says: "There is quite a lot of evidence that suggests that mutuals have outperformed proprietaries. Scottish Widows has no plans to convert.

"But, as a personal view, whether mutuals will be able to stay mutual in a global market place - that remains to be seen."

Points for choosing a pension

Do

Shop around. Compare the projected maturity values of different companies. They, or an independent financial adviser, should be able to provide you with these. Look at their record - this does not guarantee future performance, but a good record long term is a reasonable indicator.

Take out a waiver of premium cover. This will pay your premiums if you are unable to work for a period of time, and is relatively inexpensive.

Pick a plan that suits your needs. If you feel your employment is relatively stable it may be better to choose a plan that has less flexibility but which will pay out more when you retire. If not, choose a plan that allows you to suspend premiums without penalties.

Don't

Go straight to your bank or building society, or a company you have used before for other products.

Necessarily go for the cheapest option. You may lose out on performance. Look for a good all-round package.

Take out a personal pension if you are in an occupational scheme. If you wish to increase your contributions, take out an additional voluntary contribution plan or use another savings vehicle.

Mutual vs Proprietary

Property Mutual

Average illustrative maturity value

Unit Linked pounds 48,629 pounds 49,562

With Profits pounds 48,129 pounds 50,228

Maximum Illustrative Maturity Value

Unit Linked pounds 52,200 pounds 57,100

With Profits pounds 52,200 pounds 57,100

Minimum Illustrative Maturity Value

Unit Linked pounds 43,400 pounds 46,700

With Profits pounds 43,400 pounds 46,700

* 25 year personal pension plan, pounds 60 per month premium.

Source: PIA Life Assurance Disclosure: Three Years on