Equity Based Pension schemes a waste of time and money?

usignuolo

Is there any point in saving for a pension in a company's Group Personal Pension Plan? Even when times are good. The following is a cautionary tale.

From 1998-2002 I belonged to a pension scheme run by the company I worked for. The contributions the firm made were not high but it was the only way they would contribute anything at all (if I joined their scheme) so I did so. By the time I left in mid 2002 left the total value of contributions to the scheme was around £11,000.

The pot itself was worth a lot less. It was worth £7,200 in 2001 then £6,300 in 2002 and £5,600 in 2003. (My mother was seriously ill and later died during this period which is partly why I did not pay it much attention, also I was not planning to retire for some time and did have some other arrangements in hand.)

Still - the scheme was a "reputable" one, as these things go, run by GE Life who outsourced the funds management to various specialist investment firms. The two main funds were Managed and UK Equity. The falling pot was always accompanied by newsheets putting a positive spin on how well the money was being invested. Currently it has gone up to £8,800 but that was before the latest crash. It seems unlikely I will ever recoup even the amount of money invested let along with any interest. (Just to add that I opted for balanced cautious investments as a strategy for the investments made with the funds).

Is it really worth having any sort of pension invested in equities? At any time ever? I think they are all just scams to be honest.

Count_Dante

In the very long run, equities are supposed to outperform any other asset type. I agree that over the last 10 years, UK equities have been very poor, but if investing for an even longer term (as in a pension), then this ought to turn around. Although the Japanese stock market has nowhere near recovered from the early nineties crash.

I do note that you invested in cautious managed funds. I believe this would entail investing a large part of your fund in less volatile assets, such as gilts. The pension I pay into allows me to invest in a large number of funds, in theory allowing me to invest my entire pension in gilts or cash - maybe yours can do the same?

usignuolo

Well there was a choice of 14 funds and my money was invested in 5 of these and the bulk of it was in so called cautiously managed funds and UK equity. There might be gilt and cash options but I can't see anything called that. The only fund that didn't lose any money but didn't gain either between 2001-5 was the Fixed Interest which made a miniscule return.

In any case this scheme was sold to the staff across the company and it was light engineering and most of them were shop floor workers and to be honest their heads hurt when I tried to discuss it with them. Nor could they ask the union to act for them because the union had been de-recognised as soon as that became possible. The staff Trustees were not much better informed. And the board had their own separate scheme.

Don't get me wrong, the senior managers didn't really understand pensions either, not being from an actuarial or accounting background and they genuinely thought they were doing the staff a favour by having the scheme at all, and trusted the advisors who sold it to them.

I just wonder if any of these schemes are worth while. So much money stuck in badly managed funds. It can't be in the government's interest surely to have people left without pensions or with worthless pensions as it only puts them back on the state?

dunstonh

Well there was a choice of 14 funds and my money was invested in 5 of these and the bulk of it was in so called cautiously managed funds and UK equity. There might be gilt and cash options but I can't see anything called that.

Cautious managed funds will typically include gilts, fixed interest and sometimes property.

The only fund that didn't lose any money but didn't gain either between 2001-5 was the Fixed Interest which made a miniscule return.

It wouldnt have been a good performer in that period. It wasnt the right time in the cycle. However, with annual rebalancing it can be a good option even when the fund isnt performing as well as you want it to.

Don't get me wrong, the senior managers didn't really understand pensions either, not being from an actuarial or accounting background and they genuinely thought they were doing the staff a favour by having the scheme at all, and trusted the advisors who sold it to them.

They are doing the staff a favour. From 2012 they wont have any choice in the matter as employers will be forced to pay into pensions.

I just wonder if any of these schemes are worth while. So much money stuck in badly managed funds. It can't be in the government's interest surely to have people left without pensions or with worthless pensions as it only puts them back on the state?

They are worthwhile. You are typically putting money aside for 40 or even 50 years. Times like these occur on avearge once every 7 years and are a good time to be buying. Some bear markets last longer than others or take a bigger hit but for those further away from retirement times like these are buying opportunities. You get your units 40% cheaper than 18 months ago. In the long run, its these that make the most money. Then as you get closer to retirement, you reduce the risk of the investments (either you or your adviser or the pension itself may have automatic risk reduction) by using cash and fixed interest funds.

Dont make the mistake that because you see a short term loss that a fund is badly managed. For example, a fund in the UK all companies sector has to invest in the UK stockmarket. It cant pull it out and put it in cash when things look bad. It will have some scope for a small amount but it will have to remain invested in the stockmarket even if they know full well its going to lose money in the short term.

This is not the first crash. It is not the last. This is quite a regular occurance. Its easy to get disillusioned if you are not used to it and/or you get carried away with the media doom and gloom whilst things are at their most volatile. However, you should mostly ignore it and carry on.

Jennifer_Jane

As a non-IFA, but ex Financial Advisor in another country, can I perhaps suggest that if people have this kind of pension fund, that they get advice on them from an IFA? It sounds like you should take your concern to the Company to get a group visit from an IFA for you all (my Company does this on occasion and has reduced rates for advice).

For me, I am extremely happy with the way my pension fund has performed. But then I actively manage it, and switch when I think I need to. If I had time, then I would be buying into something like Emerging Markets and/or European Equity funds which are currently showing quite large declines over the year - so are cheap to my mind.

What I actually did, was to move out of those funds into Cash (ie Fixed Interest) in July 08 (I don't like Gilts or Bonds, but that's just me). That means that I am weathering the storm till retirement in August 09. But if I weren't retiring for a few years, I would be buying into higher risk funds.

Unfortunately it is the way of the world, that more and more you have to take responsibility yourself for your pension funds, and people have my sympathy. But you cannot say that equity funds are a scam; they're just doing what they do - go up/go down. High risk/high return (or loss).

You need a Financial Advisor to tell you if the funds are actually badly-managed, perhaps you should let us know who is managing the funds for GE Life and Dunstonh or someone can give an opinion.

Good luck - it's not easy, especially if you have had other concerns in your life, and don't have easy access to a computer to check the funds online.

Jen
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usignuolo

DunstonH I would make two points here - first the idea that you are putting away your money for 40 or 50 years. This is fine if you start one job and stay in it for the next 40 years but how many people do that now ? When you move to another firm you cannot transfer the fund, you have to freeze or continue it separately and join the new firms scheme as well if you want to get the employers contributions. Also many of the staff who joined the scheme were in their 30s and 40s. Are you saying these people should not join a scheme as they will not be in it long enough to benefit from the ups and downs of the stock market?

And in reply to Jennifer Jane it was an IFA who advised the company staff to put their money into the then National Mutual scheme which was later taken over by GE life when NM demutualised. The investments were recommended to the staff who most of them, had very little if any understanding of the stock market, and just ticked the "cautious balanced" box. The various funds were managed by various fund managers including Goldman Sachs, JP Morgan Flemming, Schroeders etc. The point really is that neither the senior managers of the company (who had no financial background and anyway had a separate scheme) nor the great majority of the staff had the skills or experience to understand how the scheme work, they basically just signed on the dotted line. And indeed none of them would have been in it for a 40 year haul as the firm shut down last year.

So many of these schemes seem to assume a career (for life) which no longer applies and that ordinary people can understand how stock markets and pension funds work (they can't). And finding a fully and truly independent IFA who is also competent can be easier said than done, as I know from my own experience.

Jennifer_Jane

Quote "And in reply to Jennifer Jane it was an IFA who advised the company staff to put their money into the then National Mutual scheme which was later taken over by GE life when NM demutualised. The investments were recommended to the staff who most of them, had very little if any understanding of the stock market, and just ticked the "cautious balanced" box."

Hi, I have no knowledge of UK funds or products, so cannot comment on the specifics.

Yes, I know that most people have little understanding of the stock market and I agree that this is a difficult thing. My point was that now that responsibility for pension funds is laid at your own door, it might have been an idea to ask the Company to call in an IFA for the Group to give some guidance. Anyway, you say the Company has closed now. For me, well, I knew nothing about money in the UK so I took it on myself to do the 3-year Financial Planning Diploma. I agree, however, that this is over the top!

Nevertheless, you cannot say that Equity funds are a scam per se, as I said, they've suited me (for one) very well.

It's the way of the world that responsibility devolves back to you these days, I'm very sad to say.

Anyway, here is something from iii.co.uk, which might give you pause for thought:

http://www.iii.co.uk/articles/articledisplay.jsp?section=Markets&article_id=9962317

As I said, good luck with it. I wasn't criticising you in any way, by the way, and for people who are not looking at their funds, then I think the IFA was giving honourable advice with suggesting the cautious balanced portfolio. I personally don't like them, as I am a bit of a gambler and understand the risks (I lost money in the dot.com bubble, and treated that as part of my education!). Hope that Dunstonh comes back with more opinion!

Jen
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dunstonh

first the idea that you are putting away your money for 40 or 50 years. This is fine if you start one job and stay in it for the next 40 years but how many people do that now ? When you move to another firm you cannot transfer the fund

Yes you can move your pension fund. It may not always be best to with final salary schemes but no problems with money purchase and thats the way most pensions are nowadays. However, its money purchase schemes that you are talking about and you can move them around very easily.

Also many of the staff who joined the scheme were in their 30s and 40s. Are you saying these people should not join a scheme as they will not be in it long enough to benefit from the ups and downs of the stock market?

Of course they should join it. Free money, tax relief and funding for their retirement. Either that or get ready to live on £4700 a basic state pension.

And in reply to Jennifer Jane it was an IFA who advised the company staff to put their money into the then National Mutual scheme which was later taken over by GE life when NM demutualised. The investments were recommended to the staff who most of them, had very little if any understanding of the stock market, and just ticked the "cautious balanced" box.

So, in other words they chose they fund. Nothing wrong with it though. Its simple fund for people who want a simple fund. It will never be the best option but its the lazy option.

So many of these schemes seem to assume a career (for life)

No. Thats you assuming it.

and that ordinary people can understand how stock markets and pension funds work (they can't).

They dont know how cars work but they still drive.

And finding a fully and truly independent IFA who is also competent can be easier said than done, as I know from my own experience.

Finding a competent IFA is easy. Much easier than perhaps it used to be if the stats are anything to go by. Last year just 4% of complaints are on IFAs despite doing the majority of transactions. Stats that have been getting better each year (the opposite is true for the FAs).

for people who are not looking at their funds, then I think the IFA was giving honourable advice with suggesting the cautious balanced portfolio

Totally correct. There is a saying. "simple things for simple people". That sounds rude almost buts it not meant to be. There is no point an IFA building a proper portfolio if the person isnt going to be using that IFA for servicing and the individual has no intention or no ability to review it themselves. Indeed, since Nov 07 it has been a regulatory requirement for IFAs to consider the IQ of the individuals when making recommendations.

I dont like balanced managed funds or cautious managed funds particulary. However, they do serve a purpose.

usignuolo

The point I was making is that when I left in 2001, I had £11,000 invested in my funds, in cautious balanced investments, based on the advice of an IFA hired by the company. In 2002 this was worth £6300, in 2003 £ 5,600, in 2004 £6450, in 2005 £7400. I did not get any returns in 2006 and 2007 as the company changed hands, but the latest statement says as of just before the crash it was worth £8,800. God knows what it is worth now.

In Jan 2007 DunstonH you wrote "A decently invested pension (or any other investment) of medium risk should be up around 60-100% in the last 5 years. (more than property as it happens)."

Well clearly my funds were not decently invested. And this is partly my point, I was only in that job for a few years (as many people might be these days) and I took the pension fund option because it seemed a good way of saving but I have only lost money. I might have been better off taking the money and putting it in the post office. In fact someone posted a note on the web last week about how irish pensions invested in managed funds only increasing, on average 3% between between 1998 and 2008 and it would have been more profitable to invest the money in the post office.

Also you make the point that just as most ordinary people don't understand how stock markets work so that they don't understand how cars work but they still drive. True, I have no idea how my car works but I take it into Nigel's garage for a regular service or when it breaks down and he keeps it running in good order for me. If Nigel kept giving my car back in a worse condition then I would soon find another garage. I cannot do that with my GE Life pension. I was dependent on the IFA for advice and the fund managers for investing it, but it was only this scheme which my firm would support and for three years virtually every fund in it lost money. (The company was not prepared to contribute to personal pension plans.) So the car comparison is not quite the same. I trust Nigel, I do not trust GE life and their investment funds.

tomstickland

It doesn't matter what it's worth now though. If it's invested in reasonable managed funds or trackers it should be worth a lot more when stocks pick back up.

dunstonh

The point I was making is that when I left in 2001, I had £11,000 invested in my funds, in cautious balanced investments, based on the advice of an IFA hired by the company.

The IFA employed by the company to act for the company and provide you with basic advice only in relation to the pension. That is what you got and you ended up in a basic fund.

In 2002 this was worth £6300, in 2003 £ 5,600, in 2004 £6450, in 2005 £7400. I did not get any returns in 2006 and 2007 as the company changed hands, but the latest statement says as of just before the crash it was worth £8,800. God knows what it is worth now.

Those returns dont really seem to be consistent with expecations but we without knowing the fund details its hard to comment. It sounds like it wasnt heavy enough in equities. Which ironically which is something you think shouldnt be the case but you probably would have been better off had it been.

Also you make the point that just as most ordinary people don't understand how stock markets work so that they don't understand how cars work but they still drive. True, I have no idea how my car works but I take it into Nigel's garage for a regular service or when it breaks down and he keeps it running in good order for me. If Nigel kept giving my car back in a worse condition then I would soon find another garage. I cannot do that with my GE Life pension. I was dependent on the IFA for advice and the fund managers for investing it, but it was only this scheme which my firm would support and for three years virtually every fund in it lost money. (The company was not prepared to contribute to personal pension plans.) So the car comparison is not quite the same. I trust Nigel, I do not trust GE life and their investment funds.

The IFA for the firm is not your IFA. They are there to do the administration. Not to service you. They may well service you on request but thats about it. With your car, you phone the garage and book the service. When did you phone to book your pension a service?