Pension problems: how to deal with an underperforming fund
Even Prince Charles has joined in with criticisms of the pensions industry
"THE Prince of Wales may know as much about finance as the average fund manager knows about the royal family," says Neil Collins in the FT, but his critique of the £2 trillion pensions industry is "uncomfortably close to the truth".
Charles told the National Association of Pension Funds last week that the focus on "quarterly capitalism" was making the industry increasingly "unfit for purpose".
Short-termism is indeed a problem, says Collins. But it's a symptom rather than the cause. "The malaise in this industry can be easily summarised: too many coins are sticking to the shovels of the managers and the brokers": they get paid whatever happens to the fund being managed. And since the current system suits them so perfectly, their reaction to the royal call for change will probably be: "Why should I bother?"
How to spot a dog
If you want to know how your own fund is doing, a useful (if depressing) starting point is adviser Bestinvest's "Spot the Dog Pension Edition", which names and shames the funds that have consistently disappointed, says Chiara Cavaglieri in the Independent on Sunday.
Bestinvest identified a shocking 113 funds, with combined assets of around £31bn, that have underperformed their benchmark or peergroup by at least 10 per cent over three consecutive years. The main culprits were "consolidators" with multiple funds: notably, Friends Life and Phoenix, which have taken on funds from other insurers. But the list of offenders is sprinkled with many other big names.
Over ten years, the picture wasn't much better, reports Bestinvest. Its list of "long-term laggards" showed that the worst funds have underperformed sector averages by more than 40 per cent.
Don't assume, however, that you're out of the woods if your fund doesn't feature in the Bestinvest doghouse. "These funds represent the worst of the worst so your money could still be stuck in pedestrian funds."
Put your provider on the spot
Many of us start a pension plan and then put it on the back burner. But while the best advice, clearly, is to monitor performance at regular intervals (experts advise every six to 12 months), it may not always be in your best interests to switch out of an underperforming fund. It's certainly a finely balanced decision.
"There is a risk you could leave one fund that is just about to turn a corner and move into another that has already peaked," says Cavaglieri. Moreover, transferring to a different provider "can be a minefield in terms of exit penalties, or losing valuable benefits bonuses or guarantees" - especially if you're nearing retirement and don't have time to recoup the costs.
The best course of action is to put your existing provider on the spot. Ask for details of the past performance of funds in which you're invested, and for a full run-down of charges. "Many pension policies now offer a range of investment choices, so you could find a better place for your money without having to transfer."
If there are no suitable alternative options to your underperforming fund – and it is clear you are really paying through the nose on charges – then is the time to consider switching.
Hands off Isas!
Given the apparently rapacious nature of the pensions industry, it's hardly surprising that burgeoning numbers of savers have switched to Isas instead, says says Andrew Oxlade in The Sunday Telegraph. Which makes rumours that the Treasury is considering "tinkering with Isas" – possibly by imposing a cap on how much can be saved over a lifetime tax-free (a figure of £100,000 has been floating around) - all the more worrying.
Simple to understand, with none of the complications that surround pensions, they've been a "saving grace" for millions of retirement savers. "It would be completely insane to mess with Isas," says Rebecca O'Keefe of Interactive Investor. Let's hope the Treasury is listening.
A version of this article appears in the 26 October 2013 issue of The Week ·