Does Your Pension Offer You Value For Money?

A recent Office of Fair Trading report on defined contribution pensions suggests that that many "defined contribution" pension schemes offer poor value for money. This will have come as no surprise to financial planning professionals, given the excessive charging structures on some older schemes.

Whilst no-one expects their funds to be advised upon or managed for nothing, there is no doubt that there are some pretty expensive schemes out there; and I would identify three areas for particular concern. Firstly, if you have a pension scheme taken out by a company that no longer exists but whose contracts are now being administered by another company, you would be well advised to arrange a thorough review. Not just of how much is being taken in charges but also, perhaps more importantly, what sort of management your money is receiving.

You may well discover that your money is in a closed fund, where no new contributions are being accepted. These are colloquially known as zombie funds, for the obvious reason that they are the pension fund equivalent of the living dead! This is significant because the managers will have to be prepared for the fact that money will be leaving the fund regularly as a result of retirements or people transferring to better value schemes; with no new premiums arriving to replace it. As a result they will have to have a much higher level of liquidity than a live fund, meaning that more of the fund is likely to be held in readily accessible but low yielding cash. Less will be held in assets with better growth potential but higher volatility like equities, gilts and corporate bonds.

Unfortunately media coverage of this issue tends to focus on charges alone, but the real issue is charges and performance taken as a package. To put it simply, given a choice between a fund charging 1.5 %but producing 10% or one charging 1% but producing 5%, which would you go for? Charges are a fact of life if you want someone to manage your money for you, but a combination of high charges and low returns is clearly unacceptable.

The second area of concern would be schemes taken out before the introduction of the Stakeholder legislation in 2001. Generally speaking, the older the scheme the higher the charges are likely to be as the lack of any robust requirements for disclosure in the 1980s and 90s meant that it was virtually impossible for anyone taking out a pension scheme to get a clear picture of the charges involved.

Ironically, the final category is Stakeholder schemes themselves. When they were introduced they were intended to revolutionise and reinvigorate the pensions market but the failure of the Government to make employer contributions compulsory meant that they never really took off. The idea of trying to cap charges to 1% pa was admirable, albeit misguided (on the basis that if you pay peanuts you get monkeys) but the result was very limited fund choice and management that was largely aimed at those with very little appetite for risk.

The reason that those with Stakeholder schemes should review them is that there are now cheaper options that offer much wider investment scope and therefore the prospect of higher returns. Transparent share classes and multimanager approaches based on the use of tracker funds means that it's now possible to achieve a global investment spread which is adjusted according to market conditions for much less than 1% pa.

If any of this strikes a chord then don't hesitate to get your pension thoroughly checked by a professional. If you would like to talk to me about it then please don't hesitate to call me on 0844 800 3370.

Robin Sainty APFS M.A. (Cantab)