FOOL'S EYE VIEW
It's Your Pension!

By Christopher Spink
April 3, 2001

When you take out a pension you may feel very removed from the whole process. You agree to pay in a certain amount of your salary and hope in return to get an income when you finally retire, forty years later. That's the contract you sign up to but how do you get from A to B? And what happens if you don't make it?

Only in recent years have these issues become more important. Before, people just presumed that their regular savings became a pension pot by going through some magic process. At least that's how pensions were sold to individuals and that's how it seemed to savers.

Last week two personalities, who brought pensions more into the public eye than anyone else, made the headlines. The DTI report into Robert Maxwell's murky manoeuvres was published and Carol Galley of Merrill Lynch announced her retirement as a fund manager.

What, you may ask, links these two figureheads, apparently from opposing sides of the financial spectrum?

Maxwell and Mercury

Well over the past decade both brought into the limelight the power of pension funds. On the downside Maxwell's private tinkering with the Mirror Group's pension fund broke the secrecy surrounding such investments. This led to the revised pension rules and tightened up trustee legislation.

More than anything else Maxwell's machinations made ordinary savers aware that pension provision was not some magic trick but a real live process that required some attention from savers. What must have surprised people is how few individuals were, and still are, in control of these substantial pension funds.

The power of the pension fund managers was thrown into sharp relief in 1996 when Carol Galley, the investment manager of Mercury Asset Management, along with her colleague Stephen Zimmerman, decided the fate of the Forte Hotel chain, when they agreed to Granada's (LSE: GAA) hostile bid.

Since then Mercury has been taken over by US giant Merrill Lynch. At present the company, led by Galley and Zimmerman, is in charge of £360b, through various investment and pension funds.

When confronted with such mind-boggling figures, the media's general reaction is to coo and talk about Galley as a "superwoman". This lets pension fund managers off lightly, ignoring the fact that they are in charge of serious sums of money on behalf of millions of individual savers.

At least Maxwell's activities ensured that company bosses could no longer control their employees' pension funds. Now as more and more individuals are becoming increasingly aware of the pension process, people are focusing on the important issue of how these funds are performing.

Since the great Granada coup, which thrust Galley into the limelight, her company's managed funds have not performed terribly well. In 1999 this prompted food giant Unilever (LSE: ULVR) to sue for £100m claiming that its £1b pension fund, managed by Mercury, had underperformed by a factor of 10%.

This claim is ongoing.

Painful pension lessons

Maxwell's unplanned 1991 sea voyage showed that nobody should blindly entrust his money into someone else's hands. Mercury's recent performance shows that even the most "professional" pension fund managers can experience significant blips in their returns. So be careful where you put your money, particularly if it's earmarked to provide for your future pension. You may have a picked a Maxwell rather than a Galley.

On Friday, you can take out a stakeholder pension for the first time. These new products can only charge a maximum of 1% in fees each year. In addition there are no charges for switching between schemes and various funds or stopping payments altogether. That's a step in the right direction, making pension provision more efficient in this country. It's a pity it needed Maxwell to show us the way.

More: Motley Fool's Pension Centre