Getting bad news on my pension statement

We got our pension statments in March this year. Like most people my pension is DC and I am invested in a global equity fund.

The shock of seeing my fund fall 35% year on year was not cushioned by my understanding that the value of units can fall as well as rise.

In my head I had an expectation that what had been worth £30,000 last year would, with some extra contributions, be worth £40,000 this year. Infact it was worth about £24,000.

£40,000 and not £24,000 was my intuitive expectation and I suspect it’s what most other people’s would be.

I asked myself the questions at the time, “why do I have this expectation and is it a good one?”. I concluded that the expectation came partly from 10% being a good round number, partly from the projected growth on my fund that was advertised when I took the thing out and mostly because when I was a little baby at work, I had taken out (and sold) with profits funds that as well as guaranteeing a little bit of growth, were generally expected to return around 10%.

Now in those days no one got very frightened by a 10% year on year increase in RPI and nobody was that scared of 10% interest payments on their mortgage. To have thought that a Government could be targeting an inflation rate of 2% would have been seen as miraculous to most people! Maybe 10% is a bit out of date!

I market a Diversified Growth Fund (DGF) to DC Pension plans. It has a modest target of providing cash plus 3.5% to its investors- that’s about 4% this year (rather less than the guaranteed return on some with-profits funds!). It does what it says on the tin and is on target to return about 8% at the launch of its anniversary in a couple of months time. It didn’t go down when the equity markets went down and it didn’t go up in line with the recent surge in stock markets.

It’s too early in the fund’s life to say that it is impervious to the boom and bust cycle of equity markets and too early to say that it will achieve equity like returns over the longer term (though that is the expectation I have). I’m very glad that it is trying to do so and I hope to be able to blog in 2015 that those members who embraced diversification and paid the higher fees of a DGF, have profited, not just from the growth, but from the smoother ride along the way.

My worry is that in the meantime there will be an awful lot of members of DC plans who will receive over breakfast the kind of bad news I received in March and will become so disillusioned with the volatility in the value of their pension fund that they give up on retirement saving or cash out their equity holdings preferring an investment approach that gives little or no prospect of real returns.

I don’t think that most people are prepared to put up with wild swings in the value of their pension accounts. I think many people are put off engaging with pension provision becuase they have no confidence in the accumulation process which does not meet their expectations .

Maybe an expectation of a 10% return is a little out of date. Maybe it should be adjusted downwards. However I think the expectation of a regular positive return on my pension fund is not unreasonable and while I accept that some form of absolute return will inevitably come at a price (if only from higher charges) I am personally prepared to pay that premium in return for no further nasty surprises.

The managers of DGFs in the UK should be very mindful of the purpose of running these funds. Whether it is to protect the balance sheet of the sponsor of DB plans, or keep the mass of DC members from benefit statement misery, DGFs have a key role in restoring the confidence of the UK population in pension provision. I hope that they do not revert to the “new balanced” model, chasing equity returns to beat their peers rather than providing eqity like returns without the volatility. This will require some nerve – especially if the current bull run (I’m writing in early September 2009) continues.

If, as seems likely, PADA are prepared to grasp the nettle and establish an investment objective for the Default Fund of Personal Accounts as a (positive)target return, I hope that this will encourage other pension schemes to adopt a more ambitious approach to the management of DC defaults. It is the fiduciaries of our personal pensions and occupational DC plans who are best positioned to take the initiative.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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