Nine out of every ten pension funds investing in UK stocks have failed to beat the overall return of the stock market over the past decade.
The investment platform AJ Bell said that 189 of the 208 UK equity pension funds had a lower return over the past ten years than the iShares UK Equity Index, a tracker fund that aims to replicate the holdings and performance of the biggest 565 UK-listed firms. That’s 91 per cent of funds underperforming. About 72 per cent of the funds performed more than 10 per cent worse than the tracker fund.
The iShares UK Equity Index fund, which has a 0.05 per cent annual fee, has gained 73.7 per cent over ten years, according to the research firm Morningstar. If you had invested £10,000 ten years ago you would now have £17,370. This return factors in a 0.25 per cent additional charge to mimic the costs of investing through a platform.
By contrast, the worst-performing UK equity pension fund, the Standard Life/Invesco Perpetual High Income 4 pension fund, which charges 1.88 per cent a year, is up just 13 per cent. This would have grown a £10,000 investment to £11,300. It means that investors in this fund are paying about 38 times more in fees for a fund that would have left them £6,000 worse off than the tracker.
Other funds with poor performance include the Standard Life UK Equity 4 pension fund, which has returned 44.5 per cent over ten years, and the Sun Life Canada CLIC Equity 1 pension fund, at 46.7 per cent. These funds often contain different share classes — identified by the numbers in their names. Share classes are essentially groups of shares in a fund with subtle differences, such as fees and whether dividends are paid directly or reinvested into buying more of the same fund. Each share class has a different level of performance, so your overall return will depend on which class you are in.
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Laith Khalaf from AJ Bell said: “The magnitude of some of the underperformance in pension funds is concerning. This doesn’t look like a market that is serving consumers well, yet tens of billions of pounds is invested in pension funds posting disappointing performance. This has seriously damaging effects in the real world because of the impact on the size of savers’ pension funds when they retire.”
There are some better performers, though. The Pru/Royal London Sustainable Leaders A pension fund is up 124.6 per cent over ten years, which would have turned a £10,000 investment into £22,460. The LV= Artemis SmartGarp UK Equity fund (S2), returned 122.8 per cent, which would have grown your pot to £22,280.
What it means for your retirement
Say you have a pension pot worth £50,000. If your pension investments delivered an annual return of 6 per cent over 20 years, you would have £167,357. This would leave you £57,801 better off than if they had returned 4 per cent a year, at £109,556. This example assumes you made no further contributions during that time.
“Returns from the UK stock market itself haven’t been great over the last decade, but funds which have fallen significantly behind a tracker add insult to injury,” Khalaf said.
One reason for the poor performance is that these funds were launched decades ago and their managers invested in a similar way to the index, while also charging higher fees, which compound over time to decimate their returns. Many of these old pension funds are closed to new investors, which gives firms less incentive to reduce fees as they focus their attention on newer products. Many savers in the funds don’t realise how poor the performance is. “It is effectively an inertia tax,” Khalaf said.
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If you are worried that your pension fund is underperforming, contact your pension firm and ask for the fund’s factsheet. This should help you make a decision. You can look at the fund’s performance against its “benchmark” — the investment index it is measured against. Next, look at the fees. This is usually a percentage, it may be called the “ongoing charge”, “annual charge” or “total expense ratio”. Anything above 0.75 per cent and you are probably paying too much, particularly if it is underperforming.
A cheap index tracking fund can cost as little as 0.2 per cent. But before you move your money, check that your pension plan doesn’t come with valuable benefits such as a guaranteed annuity rate or investment returns linked to a specialist insurance company’s fund, which may make it worth staying put.
If you want to move your money, you can choose a different fund with your pension scheme company, which is usually the best option if you are getting contributions from your employer. Or you could move your money into a self-invested personal pension (Sipp) with an investment platform, where you will have thousands of investments to choose from. Don’t forget to factor in the platform fees though, and check whether you can still get employer contributions.
