21st October 2013
It is not great to have to tell investors that some of their pension money is languishing in underperforming funds, but that there is not a great deal they can do writes John Lappin.
Yet this is the grim reality exposed by the latest Spot the Dog report into pensions from Best Invest, which reckons there is around £31bn languishing in 113 underperforming pension funds. The report is available here on Best Invest’s website.
To earn a place in the report, funds must have failed to beat their benchmark* over three consecutive 12-month periods in succession and also by more than 10% over three years.
Phoenix and Friends Life are among the two pension fund providers with the most dog funds, with 15 and 17 underperforming respectively.
In such instances, at the very least investors should consider switching unless the pension fund manager concerned, or the external fund manager contracted to manage the money can provide assurances that performance is due to improve. It is possible that the explanation is valid. Perhaps current market conditions do not suit the investment style but they can demonstrate it will come good in the end. In this case, investors should either satisfy themselves or ask an adviser to check if such assertions are true.
That is fine as far as it goes. But although these surveys are designed as an important marketing tool for Best Invest, which obviously wants you to switch to their solution, the problem is that switching may not make sense because some of these contracts contain penalties.
Bestinvest business development and communications managing director Jason Hollands, talking to trade website Fundweb, says: “Pension fund performance gets far less scrutiny than the unit trust and OEIC world. In fact many people have simply lost track of a pension, let alone understand how their plans are performing. Inertia is compounded by the mind blowing technical jargon that surrounds pensions.
“Pensions transfers are a minefield, as there can be steep penalties or loss of benefits so you shouldn’t automatically switch. It therefore makes sense for people to take professional advice before making a switch.”
So it seems the advice is to check your investments, see if you can move and seriously consider it, and if you can’t without a big penalty…
Well if you can’t, there is some hope. The Office of Fair Trading has recently issued a report looking at whether old legacy contracts are fit for purpose given the Government’s new workplace pension reforms. The regulator is very worried that the old contracts do not offer value for money. The ball has been placed in the insurers’ companies’ court with the Association of British Insurers’ reviewing their older contracts to see if they pass muster.
But what worries Mindful Money, is that some closed insurance companies are not members of the ABI. They have been making a nice living, charging what seems to be mostly what they want, often underperforming and justifying such policies because they say they took over old insurance companies that couldn’t cope with the economics of staying open.
Allowing transfers without penalties undermines the economic position of some of these funds, they say.
Mindful Money suggests that this might be true. But it is time the regulator, the Financial Conduct Authority audited these funds to see if this really is the case, whether these contracts are really in the consumer interest and if not whether they can be changed.
To put it another way, if at all possible these funds should be opened up to competition – and that could help with performance and charging. you might then adopt Best Invest’s offered solutions or one of a thousand more in the market.
It is terrible that funds may be underperforming and there is not much investors can do, except to leave them paid up and to hope for the best. We think the latest Spot the Dog report gives £31bn reasons why regulators should see if they can change things and allow their investors to do something about it.
And if you see one of your funds, and can move the money, maybe you should.