Topping up a pension plan creates hostages to fortune: Vivien Goldsmith on the ABC of AVCs - and which have done best and worst

A MILLION people, 10 per cent of company pension scheme members, make additional voluntary contributions (AVCs) into a company scheme.

They have no say in the fund or funds chosen by the trustees of the company scheme. Yet the differences between the schemes and fund managers can make an enormous difference to their fortunes in retirement.

Bacon & Woodrow, the actuaries, looked at five and 10-year performance for three types of scheme.

Most are based on with- profits funds. The best performers were CIS, Sun Alliance, Scottish Mutual, Eagle Star's unitised fund, Guardian (GRE), the Pru, and Commercial Union's closed fund. On the usual reduced commission terms, all produced average returns of 12 per cent a year or more over the past five years. The worst fund, Scottish Equitable's closed fund, paid 6.4 per cent. Friends Provident, Standard Life and MGM produced less than 8 per cent.

Over five years those schemes set up without commission payments typically deliver an extra 2 per cent a year over those that pay a salesman commission.

Over 10 years, CIS, Sun Alliance and the Pru take the top three positions, with London Life, Guardian and Legal & General at the bottom.

Managed unit-linked schemes account for fewer than 10 per cent of company AVC schemes. Over the past five years Gartmore, Rock Asset Management, Clerical Medical and Norwich Union put in the best performances. Friends Provident, Guardian, Scottish Mutual and MGM showed average losses, and Scottish Widows stood still.

For deposit-based schemes run by building societies, the differences between the best and worse performers were quite small.

The best results over five and 10 years were provided by Yorkshire, Woolwich and Northern Rock with annual returns of over 10 per cent in the past five years and over 11.3 per cent in the past 10. At the bottom were Halifax and Coventry Building Society with an average of 9.5 and 9.6 per cent over five years, and 11.1 per cent over 10.

But fund performance is only one factor that can affect the outcome for individual scheme members. Some schemes, particularly with- profits schemes, penalise people who take early retirement. Others are harsh on those who remain in the scheme for short periods, often those nearing retirement who are scrambling to get as much as possible into their pensions.

Steve Mingle, Bacon & Woodrow's AVC specialist, picked out Britannia Life's managed fund and Guardian's with-profits scheme as the worst offenders.

He said that trustees who had to provide an AVC scheme were usually assiduous about reviewing the main scheme, but often overlooked the AVC scheme.

Members should ask trustees if they have reviewed the AVC arrangements and checked whether they had the best choices available for the variety of scheme members.

Building society schemes suit those near retirement who want to take no risks. Young people who expect to pay into the fund for many years will probably be better off in a unit- linked scheme.

(Photograph omitted)