Savers suffer as pension funds perform poorly

Too many British savers are investing their money in pension funds that perform poorly. The worst are actually shrinking savings, while still receiving handsome management fees for their inadequate services.

The message, delivered in new research into pension fund performance, is a wake up call for those who have a pension plan, but pay little attention to where their money is invested. In many cases, timely advice from a professional pension adviser can make noticeable differences in the return from a pension pot, substantially increasing its value over time when compared with leaving it where it is.

Research was carried out by Increase Your Pension, and looked at large pension funds, with at least £1 billion of cash under management. The study found around 90 pension funds in the UK are at this scale, with the largest – BlackRock Aquila Life UK Equity Index – responsible for managing £23.3 billion of savers’ funds. Of those investigated, the report says 34, responsible for managing £117 billion of investment money, from more than 4 million pension investors are failing to perform: the report says they are “consistently poor or very poor by any measure”.

A further 45 are considered “borderline” performing adequately but perhaps with their average return only helped by the occasional year of strong performance. There are a few stars, who deliver “exceptional” performance.

The report says that the inertia of customers means many people leave their money in the wrong place, just as so many still pay too much for gas or electricity, too lazy to be troubled to switch and save. “This enables poor performing managers to get away with their incompetency,” says the report.

The industry famously uses the caveat that past performance is not a guarantee of good performance in the future. And some funds do make a sudden turnaround, it is clear. But the structural problem of paying managers, even if they perform badly, means an even lower return to investors, once costs are deducted.

Advice to pension investors is that a small average improvement in fund performance can make a big difference, multiplied over time. Over 20 years, a fund returning 6% will create close to double that of a fund delivering an average 3% return.

So, where is your pension pot invested? Is it with one of the poor performers, or with some of the star funds? If you don’t know, it is well worth finding out, because the failure to do so could be costing you dear. And if your current pension adviser is not providing you with this information clearly and regularly, then perhaps it is time to find a new source of pension advice.