Simplification is the key - Centre for Policy Studies

whereas the typical timescale for a scheme to move into profitability could be upwards of 20
years. Consequently it concluded that providers are highly unlikely to make money.
Notwithstanding poor strategy, the current environment of low investment returns net of
charges has put retail annual management and fund management charges (totalling 2%
or more) into stark relief. 87 Even retail stakeholder schemes look expensive, despite an
annual management charge cap of 1.5% for the first ten years and 1% thereafter. Indeed,
some of today’s products have cumulative fees and costs that erode up to 40% of asset
value, 88 more than wiping out the benefit of basic rate tax relief.
Historically, inflation has masked annual charges. But in today’s low inflation environment,
this is no longer the case. Savers, quite rightly, are now questioning why they are paying
hundreds of pounds each year, often just for an annual statement, let alone a bid/offer
spread of up to 5% on some funds.
4.5 Dismal fund management performance
Over the last ten years, the combined weighted average total return of the UK’s
mainstream unit-linked pension funds has increased by a paltry 21.8%; roughly 2% a
year. 89 Particularly woeful performance by Managed Funds (accounting for half of the
market value) and a lack of diversity are to blame (85% of all money invested is in the
UK, so the emerging markets boom has been missed), along with excessive costs. By
contrast, money market funds are up 40% over the same period, and investment trusts
more than 90%.
Another source reports a similarly depressing picture for the last decade, stretching from
the height of the dotcom boom to the current credit crisis. A pension scheme following a
“typical” investment strategy 90 would have reported annual investment growth of 2.25%
(before costs). By contrast, assets deposited in the bank during the same period would
have grown at more than double that rate, earning an average of 4.7%.
Once increasing longevity, low interest rates and high charges are added to terrible
investment performance, it is no surprise that the purchasing power of the average
pension pot has slumped over the past ten years. In 2000, a £100,000 fund could buy an
annuity worth around £9,000 a year; ten years later it would pay out less than £7,000 a
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Group pensions’ charges are a lot less; typically 0.25% to 0.8% on a non-commission scheme and 0.6% to
1% on a commission scheme.
RSA, Pensions for the people: addressing the investment crisis in Britain, 2009.
Ten years to 31 August 2009. DMP Financial, The Lost Decade, October 2009.
90 According to the Mellon Caps Survey of pooled pension funds at the start of the decade.
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