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A significant majority of UK pension funds are underperforming simple FTSE All Share index tracker funds, raising concerns about the value and effectiveness of active management in this sector. This underperformance has serious implications for savers' retirement outcomes.
Key Ideas and Facts:
Widespread Underperformance: 91% of UK pension funds underperformed the FTSE All Share tracker over the past decade. (Sources: IFA Magazine, Pensions Age, AJ Bell)
Magnitude of Underperformance: 72% of funds lagged the tracker by over 10%, with 37% underperforming by over 20%. (Sources: IFA Magazine, Pensions Age)
Big Names Implicated: Funds from prominent providers like Clerical Medical, Phoenix, Scottish Widows, and Standard Life are among the under performers. (Source: IFA Magazine)
Impact on Retirement Savings: Underperformance translates into significantly smaller pension pots for savers upon retirement. (Sources: IFA Magazine, Pensions Age)
"Inertia Tax": Closed pension funds, no longer accepting new business, may suffer from neglect as providers focus on newer products, leaving investors in these funds to bear the brunt of poor performance. (Source: IFA Magazine)
Historical Context: The underperformance can be partially attributed to the proliferation of "closet tracker" funds, established when trackers were less common, charging active fees while closely mirroring index performance. (Sources: IFA Magazine, Pensions Age)
High Charges: Older pension plans often carry higher charges set before investment and platform costs declined, further eroding returns. (Source: IFA Magazine)
Stakeholder Pension Legacy: The popularity of Stakeholder pensions in the early 2000s, driven partly by regulatory pressures, has left many savers with outdated and underperforming schemes. (Source: IFA Magazine)
Consumer Duty Implications: The FCA's Consumer Duty regulation, applied to closed books from July 2024, is expected to push providers to improve performance in these funds, but its effectiveness remains to be seen. (Source: IFA Magazine)
Actionable Steps: Investors are urged to assess their pension fund performance, compare charges, consider valuable guarantees, and explore options like transferring to modern SIPP or workplace pension schemes with better potential. (Source: IFA Magazine)
Active vs. Passive Debate: While acknowledging the advantages of index trackers, experts highlight that not all passive funds are equal and investors still face choices regarding benchmarks and fees. (Source: AJ Bell)
Important Quotes:
Laith Khalaf, AJ Bell: "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... This doesn’t look like a market which is serving consumers well." (Source: IFA Magazine)
Laith Khalaf, AJ Bell: "Index performance minus high fees is an equation which leads to negative outcomes for pension savers." (Source: IFA Magazine)
Phoenix Group Annual Report: "...the Group’s view is that the risk exposure around the Duty is elevated whilst the supervisory approach matures, and closed products are reviewed against the Duty’s principles, most notably fair value, ahead of the end-July 2024 deadline." (Source: IFA Magazine)
Jason Hollands, Bestinvest: “In a bull market when most funds rise in value with the upward tide, investing can seem all too easy but tougher times are a period to reflect on your approach." (Source: Business Insider)
Further Points:
The report by Bestinvest (Business Insider) focuses on consistently underperforming funds, highlighting the long-term issues plaguing some specific funds.
AJ Bell’s analysis reveals that active fund managers, in general, are struggling to outperform passive funds, with only a third achieving this feat in the first half of 2024 and over the past decade. (Source: AJ Bell)
Alpesh Patel OBE
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