Are pension savers being short-changed? New analysis shows how badly many long-established pension funds are performing compared to simple FTSE tracker.
Research by AJ Bell has shown that a staggering nine out of ten pension funds (91%) have underperformed a FTSE All Share tracker over the last ten years. Some 72% of UK pension funds have underperformed a tracker by more than 10% during this time, while 37% have underperformed by over 20%.
Some very big names have been identified as being poor performers, including funds from major providers like Standard Life, Clerical Medical, Scottish Widows and Phoenix – potentially leading to significantly smaller pension pots for millions of savers.
Commenting, Laith Khalaf, head of investment analysis at AJ Bell, said: “It’s pretty shocking that nine out of ten pension funds investing in the UK haven’t beaten a simple tracker fund over the last ten years.
“The magnitude of some of the underperformance is equally concerning. Almost three quarters of these funds underperformed by 10% or more, and over a third underperformed by 20% or more. This doesn’t look like a market which is serving consumers well, and yet tens of billions of pounds are invested in pension funds posting disappointing performance.”
He goes on to contend that: “This has seriously damaging effects in the real world because of the impact on the size of savers’ pension funds when they retire. If you are able to get a 6% net return on a £50,000 pension pot for 20 years you will end up with £167,357. Reduce that return to 4%, and you end up £57,801 poorer, with a pot of just £109,556. 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.”
Big funds, little returns
AJ Bell compared performance of these funds and the wider sample to the iShares UK Equity Index fund, a UK tracker fund which has an annual charge of just 0.05%.
“There are a number of factors which can lead to poor pension fund performance,” he goes on to say. “Many of these pension funds were set up decades ago when there wasn’t a great deal of appetite from pension providers for investing too differently from the market. At the same time tracker funds were not widely available in the UK. The result was a horde of closet tracker funds sold to pension savers which largely follow the index, but charge fees in line with active funds
“Index performance minus high fees is an equation which leads to negative outcomes for pension savers.”
“It remains to be seen whether the Consumer Duty will drive better performance from closed pension funds. But in the meantime, pension savers can take matters into their own hands.
“Old pension funds which now look expensive and outdated were once the latest shiny models off the production line. An annual review of your pension investments is a sensible idea, along with a check on whether you’re on track to meet your retirement goals.”
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