Warning over pensions

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Pensions from with-profits policies with leading life assurance companies could be worth anything up to 20 per cent less than contributors are expecting by the time their pension plans mature, according to John Hylands, general manager of marketing at Standard Life.

He said the great majority of companies were still projecting returns that were increasingly unrealistic in the current climate of low inflation and low returns on investments.

Mr Hylands' warning is based on comparisons over the last 10 years of the returns on with-profits funds, which invested largely in equities, compared with the performance of managed funds, which are invested in a wider range of assets.

In the long run returns on with-profits funds and managed funds should even out, but all the 18 leading companies are still showing substantially higher returns on with-profits policies, reflecting the faster growth of share values in the last decade.

According to the table produced by Money Management magazine, at one extreme Sun Life is indicating that an investment of £200 a month over 10 years grew into a fund of almost £60,000 after10 years, while its managed fund, invested in a broader range of assets, would be worth only £40,000. Standard Life made little more than £40,000 on its own with-profits fund, scarcely more than its managed fund. By implication Standard Life's projections are the most realistic, and its rivals' increasingly unrealistic.

In an environment of cut-throat competition the performance figures, if they go unchallenged, could lead to heavy shifts in the choice of pension fund investments.

Some companies argued yesterday that Standard Life is basing its claims on information that is already out of date. Most, if not all, companies have already revised their forecasts for future payouts on with-profits policies sharply downwards in 1995, reflecting the slump in investment returns and significantly narrowing the gap with the performance of managed funds. Further reductions are expected in 1996.

Other companies argue that there is a strong whiff of sour grapes in Standard Life's claims, which they say reflect its own policy of continuing to pay large up-front commissions to independent financial advisers to win new business at the expense of bonuses credited to existing policyholders. This policy, they say, has failed to win the new business necessary to outweigh the adverse impact of published returns.