Is it time to switch fund?

Britain’s pension funds are seriously underperforming, with savers receiving far less income in retirement as a result. Stockbroker AJ Bell reveals that nine in ten UK pension funds have failed to keep pace with funds that simply track the UK stockmarket, as measured by the FTSE All-Share index, over the past decade. Almost three-quarters have underperformed by more than 10% and more than a third are at least 20% behind. Well-known pension providers singled out for criticism include Clerical Medical, Phoenix, Scottish Widows and Standard Life. Even small differences in performance have a substantial impact over time, AJ Bell warns. A saver with a £50,000 pension fund would see their savings grow to £167,357 over the next 20 years if their fund returned 6% a year; if that return dropped to 4%, the final pot would be worth only £109,556.

Relying on inertia

There are several explanations for the poor performance of many funds. Some of the largest and most long-standing pension funds do little more than track the market closely, but charge very high fees for doing so, says AJ Bell, with underperformance then an automatic result.

Indeed, expensive charges are at the root of many issues – even stakeholder pension plans, subject to a regulatory cap on charges, are often several times more expensive than the cheapest trackers. Another problem is that many of the largest and worst-performing pension funds in the UK are now closed to new savers. Managers and pension providers have little incentive to do better, since they’re not trying to win new business. They rely on savers’ inertia to keep hold of their cash.

For savers, this research is a stark reminder to keep track of the progress of your retirement planning . It makes sense to review your existing arrangements once a year. Pension providers are expected to publish detailed data on their fund performance, including comparisons with relevant benchmarks, which enables you to assess how well they are doing.