Scotsman article: How to make the best of a bad deal if your pension pot has been badly hit

28 March 2009

MANY pension investors would have been best served by being in cash over the past ten or 20 years, analysis by PricewaterhouseCoopers (PwC) claims.

According to PwC's research, a 50-year-old paying pension contributions for the past ten years of £24,000 would now have a fund value of £21,000 had they been invested in FTSE All Share.

In the same fund vehicle, a 55-year-old paying a total £94 ,000 in contributions over the past 20 years would now have a pension fund of £130,000. This represents an annual growth rate of under 4 per cent a year, which is less than a cash investment over the same 20-year period.

This is all very well, but there are a number of points I would make in the interests of balance. Firstly, 20-20 hindsight vision is easy. With the benefit of hindsight, my clients would all have been invested only in the best-performing asset classes and sectors in each and every year, producing truly stellar outperformance over everything.

Secondly, not many pension investors will have been invested in the FTSE All Share (or funds approximating to it) over the past ten or 20 years. While many defined-contribution (DC) pension investors will have been in balanced or managed funds which do have a high UK equity bias, these funds have the hedging strategy of also holding fixed interest, cash and often property. Moreover, actively managed funds would not have been holding all of the shares listed on the London stock exchange – fund managers would have held a much narrower range of carefully chosen and regularly reviewed stocks. If done well, this should have produced a better return for the UK equity element of a managed fund than the FTSE All Share. In addition, the manager may have reduced his exposure to equities during bear markets.

Another point worthy making is that, although it has avoided the recent downside volatility, cash does not have the capacity to bounce back when capital markets start to recover. Perhaps the most important point is the significance of regularly reviewing your investment choices with the help of professional advice. This would mean that pension investors would hold properly diversified asset classes and sectors, taking account of their attitude to risk, time horizons and fund growth requirements. Investments should be de-risked in phases as retirement approaches.

This of course highlights a problem for many members of company DC pension schemes. Often they are left languishing in a poor-performing default fund with no ongoing investment advice. Such schemes and their members are generally very poorly served in this area by the organisations that set up these schemes – often in return for arbitrarily high amounts of commission. So, while it makes an interesting story, PwC's research is not helpful.

Paul Lothian is a director of Verus Chartered Financial Planners in Dundee.

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