WITH annual and lifetime allowances for attracting tax relief at £50,000 and £1.5m respectively (due to fall to £40,000 and £1.25m in 2014-2015), pensions are the most tax-efficient way to save for retirement. But with over £30bn of pension savings languishing in under-achieving funds, savers are (often unknowingly) suffering the consequences of hidden charges and poor performance.
TIME TO RETIRE
Broker Bestinvest’s new Spot the Dog survey of pension funds is trying to change that. It lists the 113 funds, each with assets of more than £2.5m, that have failed savers by underperforming the stock market index (which they are supposed to be beating) by at least 10 per cent over the last three years. Friends Life was named and shamed as the provider with the highest number of underperformers. And the worst performing fund was the Investec American Fund – available through Skandia and Scottish Widows. So what explains this dire performance?
According to the survey, consolidated funds are the real dullards in terms of returns. Many of these legacy funds are from former life and pensions offices, like National Provident Insurance or Century Life, that are either now closed to new business, or have been acquired over time and are now in the hands of firms like Friends Life.
“The hallmark of these funds is complex and often opaque charging structures. Because they have closed, they have no onus to attract new money. The objective is to get profit, rather than provide stellar returns,” says Jason Hollands of Bestinvest. Other poor performers include Scottish Widows and Prudential – both big names operating within the fund management and insurance industries.
IN SEARCH OF RETURNS
More broadly, Danny Cox of Hargreaves Lansdown attributes underperformance to the fact that first, a number of funds, like Aviva Growth Managed, are managed to keep their performance very close to their benchmark. “To do this, they don’t take many risks, meaning you could end up with an actively managed fund which is virtually a tracker, but paying the higher costs of an active manager,” he says.
And secondly, he thinks some managers simply “aren’t very good”. With around 3,000 funds available to self-invested personal pension (Sipp) holders, there is inevitably some mediocrity. To help investors, Hargreaves Lansdown has collated its preferred funds into a list – the Wealth 150. “We believe those funds will outperform their peers in future,” he says.
Among those funds are the Marlborough Special Situations and Cazenove UK Smaller Companies – both of which have offered strong returns in the past three years. Indeed, in the last 10 years, the average UK Smaller Companies fund has delivered growth of 268 per cent against 150 per cent for the FTSE 100 Index. “The trick is for their managers to find the right companies as they head towards their growth phase,” Cox says. Of course, these investments carry certain risk, so those favouring a steady-as-you-go approach may prefer large blue chip stocks, like pharmaceuticals, where the results and dividend growth can be more predictable.
Spot the Dog also lists a set of 40 funds in four major pension fund sectors that it calls the long-term laggards: those that have underperformed the average in their sector by 20 per cent or more over the last decade. But David Smith of Bestinvest is adamant savers should not accept these poor returns. “For many, the world of pensions is shrouded in mystery, with plans rarely reviewed and even forgotten about. This [survey] is a wake-up call: your pensions are too important to ignore and you do not have to put up with dire performance.”
For those concerned their investments are undershooting, transferring most existing pension plans is usually easy. It involves completing a transfer instruction, and the new provider will do the rest. Of course, caution must come first: pensions transfers can be a minefield, with potential penalties, or loss of benefits and bonuses (like guaranteed annuity rates or guaranteed growth levels). So investors should “take care not to hastily effect transfers without first assessing the possible impact,” warns Hollands.