Fresh from Tesco's pension section ...

Ignore the loyalty points marketing gimmick - this is a tracker fund with a difference

IT HAD to happen. You can now pick up details of a pension when you buy groceries. Tesco has stopped short of selling its pensions in- store: you have to call a pensions helpline for that. But anyone who opens a pension gets 1,000 free Club Card loyalty points.

Aside from this dubious marketing gimmick, the Tesco product is more ambitious, and more expensive, than other low-cost pensions sold over the phone. Most of these keep their costs pared down by offering pensions that are set up to follow either the FT-SE 100 index (Direct Line) or the FT-SE All Share (Eagle Star, Virgin, Legal & General). This means the returns on your pension plan should simply mirror the ups and downs of the stock market. Tesco's pension, managed by Scottish Widows, offers an All Share tracker. But customers also get the choice of four other, more unusual, funds.

There's a sensible investment argument for putting pension funds in these computer-managed trackers. Many traditional pension funds, with active managers picking shares and other investments, don't perform as well as the standard index, let alone outperform it. A report last week from the WM Company found that pension funds underperformed the FT-SE All Share index by an average of 1 per cent in 1997 and 0.8 per cent in the first three months of 1998.

But the anti-tracker lobby makes it clear that once the stock market boom is over we should see the upside of active management. Many traditional managed pension funds are underweight in FT-SE 100 shares and have opted instead for buying FT-SE 250 firms and shares in smaller companies hotly tipped for future growth. "Trackers are great in a rising market," says Stephen Dight, an independent financial adviser based in Oxfordshire, "but you should expect them to fall far and quickly when the downturn comes. They have limited possibilities to protect themselves." That is because tracker funds cannot sell poorly-performing shares. Active managers can sell up, miss the rock bottom and buy again when they feel shares are on the way up again.

The answer for those interested in buying a direct pension is to look for a deal offering a FT-SE tracker fund as a core investment, with the chance to move your money into other funds or mix investments. Tesco offers tracker funds set up to mirror the investments of an average balanced pension. The international growth fund, for example, will reflect the overseas equity investment split in an average balanced pension fund. So you can opt for access to the same type of pension management you would get with a traditional pension, at a lower cost.

Tesco also offers money funds and a fixed-interest option. This allows you to swap out of equity-based funds if you think the stock market is falling. If you are approaching retirement and want a more cautious investment strategy, you can choose your own combination of funds or take Tesco's "default" option to move your money out of the stock market during the three years before you retire.

These "extras" should make the Tesco/Scottish Widows pension attractive to active investors who are looking to keep some control over managing their pension funds. But Mr Dight is not impressed. He believes this help should come automatically if you have a good financial adviser.

The Tesco pension is not as cheap as "pure" FT-SE tracker pensions. There is a 4 per cent charge taken from every contribution and an annual management fee of 1 per cent. However,

contribution fees are a more reasonable 2 per cent, guaranteed for life, if you take the pension out before September.

These charges apply to all the funds, and you can switch money around within the five tracker funds at no extra charge. Like most other direct pensions, it is flexible: you can stop and start payments when you want, without penalty.

Eagle Star Direct also offers a choice of funds, and it is cheaper than Tesco. The firm offers an All Share tracker, a UK equity fund, a less risky with-profits fund, and the lowest-risk cash-based fund. Steve Roberts, a spokesman, says many people who are initially interested in a tracker fund take advice and then choose to split their investments between a tracker and the firm's with-profits fund. Eagle Star charges an annual fee of 1 per cent, dropping to 0.5 per cent for funds of more than pounds 40,000 for tracker investments, and 1.2 per cent, dropping to 0.7 per cent for pensions invested in other funds. There is also a flat fee of pounds 2 per contribution.

If you are thinking about taking out a personal pension, it is worth comparing offers from one or two direct providers with advice from an independent financial adviser. IFAs say there are now good deals to be had from traditional pension providers. Some are now willing to subsidise new business out of their own funds, rather than taking a huge slice of investors' money to pay for set-up costs and commission for advisers. Mr Dight says the way to spot subsidised business is to check the documents you are given before taking out a pension. "The key is to look at the transfer value of a pension after one year. That amount should not be a lot less than what you have paid in."

Beware of any pension mentioning initial units, or capital units. Both terms are used to disguise heavy commission payments and set-up fees. Mr Dight believes Norwich Union, Royal & SunAlliance, Scottish Amicable, Standard Life and NPI offer fair deals on charges and consistent pension performance.

q Direct Line, 0845 3000 333; Eagle Star, 0800 776666; Legal & General, 0500 656565; Tesco Pensions, 0845 845 5555; Virgin Direct, 0345 900 900. IFA Promotion (for the numbers of three IFAs in your area), 0117 971 1177.