Personal Finance: A no-shareholder pension? The benefits are mutual
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
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.
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
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
Bargain Hunter: Nimber looks to deliver savings and profit as it turns us into a nation of couriers
10 tips for taking out a personal loan
Women born in 1950s facing severe financial hardship over pensions could have fates changed by Ros Altmann - should she choose to help
Five Questions On: GB Energy's new tariff
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
- 1 California man brutally beat 82-year-old Sikh grandfather he mistook for 'one of those people'
- 3 Charles Kennedy 'had better judgement drunk than many sober politicians' says Ian Hislop
- 5 We have six months to save the world, says leading economist
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination
Migrants in Kos: Photos show real tragedy after Brits abroad complain of 'awkward' holidays
British tourists complain that impoverished boat migrants are making holidays 'awkward' in Kos
Michael Gove determined to scrap the Human Rights Act – even if Scotland retains it
Threat to scrap Human Rights Act could see UK follow Nazi example, warns UN official
Church of England 'one generation away from extinction' after dramatic loss of followers
iJobs Money & Business
£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...
£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...
£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...
£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...
Day In a Page
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool