FOOL'S EYE VIEW
How Has Your Pension Performed?

By Christopher Spink
January 25, 2001

Great Titchfield Street, London – If you want to look after your money carefully, you should keep regular tabs on how your investments are doing. Several studies have been conducted into the performance of managed funds. These are the funds most investors get hold of by buying a unit trust, wrapped in an ISA. You can find out more about these at the Fool's ISA Centre.

There you will also find the Foolish take on the professionals who manage these ISA funds. In most cases you'd be better off forgetting the lot of them and instead buying a fund that simply attempts to match the market average: in the UK this is either the FTSE 100 or FTSE All-Share index. Such index trackers guarantee that you get almost exactly the average return.

The average may not sound so brilliant but consider this: because such index tracking funds do not have to employ expensive human managers, instead relying on a cheap machine, charges are far less than for most managed funds. This means investors who buy index trackers already have an inbuilt advantage over those who try to beat the market by plumping for a professional.

For the past 80 years the UK stock market has risen by 12% a year on average. Many professionally managed funds charge private investors at least 2% a year in commission and various fees. Some charge as much as 5%. That means your return is reduced from an average 12% a year to as little as 7% a year. Index tracking funds though charge only 1% a year in fees, and some even less. That means your 12% will only become 11%.

So fees are worth watching. They can seriously reduce your overall return from an investment. The more expensive managed funds must perform a fifth better than the market average to make them worthwhile investing in. These studies only apply to funds contained within unit trusts that you can generally pick up via ISAs. But what about pension funds then? Do you know how well your pension fund is performing?

Perverse pensions

The recent shenanigans at Equitable Life have thrown this moot point about pension fund performance into sharp relief. Many people are relying on funds to perform satisfactorily and provide for them in retirement. However, as the Equitable episode has shown, many people seem quite unsure how their pension funds are performing. This seems staggering. After all that maybe where the majority of your savings are held.

The inscrutable behaviour of many a financial services provider doesn't help. Many it seems positively don't want you to know how your money is growing (or, if you are unlucky, shrinking). The Byzantine structure of many pension funds doesn't make it easy to find out where you stand either. However, there are ways of finding out how pension funds perform in general.

Thanks to statistics gathered by CAPS, a provider of investment information services, you can now tell whether your fund is doing better or worse than average though. This actuarial consultancy has just released figures of how pension funds performed in 2000. CAPS collects data on over half the UK's pension funds so the stats are pretty comprehensive and reliable. Together these funds are worth £400b.

Unfortunately in 2000, pension funds declined on average by 3.8%. In other words the money you started with in the pension pot at the start of 2000 has probably shrunk over the past year. This was the worst performance since 1994. Nevertheless, if you had put the money in an index tracker you would have done worse. The FTSE All-Share Index fell 8% last year.

Long-term view

The average pension fund holds 80% of its money in stocks and shares. This means that when the market falls if stands to lose less value, but when the index rises, the fund won't improve as much. This certainly holds true for the past five years. According to CAPS, since 1995, the average pension fund has risen 109%. The fund has doubled over five years.

Initially this sounds impressive. However, in that five-year period the FT All Share Index has also doubled, rising 102%. However, this is before any dividends are reinvested in the index. Over that period the companies in the index have on average provided a dividend yield of 3% or so. Reinvest that and the index tracker will have done better than the average pension fund.

In addition, the charges on most pensions are pretty horrendous. They are certainly more than you pay to track the market average (1% a year). Factor these fees in to the respective investments and you would had a far more prosperous time backing the index rather than an average pension fund.

Lessons

Luckily the new stakeholder pension, to be introduced by the Government this year, will have a maximum charge of only 1% a year. This will force many pension funds to track the index, thus achieving the desired and guaranteed returns of the market average in an efficient manner.

So remember:

1. always re-invest any dividends you are paid;
2. watch out for charges of more than 1% a year on your investments;
3. consider stakeholder pensions as an alternative to your current pension scheme.

P.S. Fancy five minutes of fame?

Have you and your finances been affected badly by the poor pensions legislation that forces people to buy annuities with the proceeds from their pension fund? If so, we want to hear from you. Also, if you fancy sounding off about anything in the newspapers, over the radio or on television click here for more tantalising information. 

Where Next?

ISA Centre
Article explaining Why Index Trackers Beat Managed Funds
Pension Centre
Fool's Eye View on the Equitable Life saga
CAPS website
Pension discussion board