Average savings returns comparisons

Telegraph_Sam

If I was told (verbally) that this gentleman was and is one of their staff employed as an in-house adviser, then I would have had to call them liars if I had disbelieved them, which I had (and have) no reason to do.

The course of action, i.e. the choice of fund to move to, was not based on a full-blown written report but rather on the discussions between us at the time which I believe have been recorded in their files. I stated my objectives, they proposed the solution.

marathonic

You seem to be trying to confuse what is probably a relatively straightforward situation.

If you had asked them, 'what is the fund that has the absolute minimum risk of losing any capital whatsoever', they would have, correctly, responded a cash fund. The loses here are minimal and only account for the difference between the interest the fund receives and the management charge.

At the end of the day, they didn't missell you anything. It appears that you wanted somewhere with absolutely no risk to capital. No such thing exists within a pension wrapper.

Basically, this means that you cannot say to the Financial Ombudsman, or whoever else you decide to complain to, that the pension staff advised you to invest in a cash fund when you should have been invested elsewhere (given your objective of minimal risk).

With very few exceptions, all other funds would have seen you making some nice gains. However, those gains could have just as easily been loses - which is why you appear to have been advised towards cash.

Good luck with your complaint - but, I'm sorry to say, I'm almost certain you'll not achieve anything with it.

Telegraph_Sam

I think that these are - from a layman's not an expert's perspective - very fine distinctions. I said to them that I wanted to put my accumulated savings in a "box" where in return for sacrificing the upside I could be sure that the downside would be eliminated (the voice recorder was not running at the time unfortunately), if they then nominated their "deposit" (not "cash") fund, then I believe that it was not an unreasonable expectation or demand from a layman to assume that the result would be on a par with putting the funds in an easy access bank account - at worst. The fact that the value has actually declined in nominal let alone real terms just adds salt to the wounds and implies that the company is incapable of managing funds, given the constraints, in a cost-effective manner.
See what the response is - in fairness to them this has yet to be stated.

bowlhead99

Telegraph_Sam wrote: »

Fine distinctions between cash, property and bonds did not feature in the discussions, rather in their terminology "risk average" which in turn related to the degree or otherwise of equity-linkage. I maintain my stance that if having chosen the "highest level of security", which relates to their deposit fund, I am worse off in nominal terms after 3 years, then I have cause for dissatisfaction. Even a high street bank would have done better than that.

The highest "security" in the terminology you're using then, i.e. investment risk, would be zero equities, zero bonds. Whether you invest in a 10-year gilt at 2% yield which can lose 5-10% of principal in a relatively short space of time, or an equity which can pay a higher dividend but lose 50% of principal: anything non-cash is risky because it could lose a significant chunk of your principal, and if you state that you absolutely must avoid such risks, you might end up in the product you ended up in.

The overnight LIBOR rate is half a percent or so and has been for the last 4 years. If you go to a high street bank as an indivdual with some cash to deposit, some rates are 0.1% or less, but a lot of places you will get more than this, even for instant access because from a marketing perspective the bank hopes that if you start buying over-the-counter products like current accounts or savings accounts you might also buy loans, credit cards, insurance and mortgages. So cash accounts are a loss-leader.

If your cash is not unwrapped and not available to walk-in to a high street bank masquerading as potential future retail custom, to get these good rates, but is instead sitting in some institutional account, it cannot possibly get 2%+ for overnight or 1 month access. Instead it will get the rate that big institutions get when they deposit millions instant access - half a percent at most. Take off the annual management fee of half a percent and you cannot make a profit. But by doing this, you are indeed taking close to zero investment risk, which is the objective you had which you explained to us.

Telegraph_Sam wrote: »

Strictly speaking of course money invested in a ("deposit") retirement plan is less accessible than an instant access savings plan and should therefore have a better yield.

As Marathonic suggested, presumably you could have taken every penny out of the 'deposit' option and dropped it into their equity option at less than a week's notice. Hence they cannot deposit it for you with a 20 year view. They have to be prepared for you and all the other customers to want to withdraw instantly and buy bonds or equities depending on movements in global markets. And overnight deposit rates, which will form much of their solution, are very low.

You might personally not want the money for exactly three years and eleven point five days, but unless you are paying them a huge amount of fees, they are not going to build you a bespoke solution. The best they can do is put you in the plan they have which most matches the needs that you articulated during your phonecall (preservation of capital).

As I said it is a catch 22 in that the investor is obliged to accept a reduction in fund value (due to the impracticality of cashing in as you point out)

despite taking precautions to the contrary..

What particular precautions did you take to ensure that you invested in a product delivering a greater gross return than the fees? It sounds like you did not take any precautions at all, and just wanted to avoid losing 10% or 20% or 50% due to unfavourable movements in the bond or equity markets, so they put you in that option. What percentage have you actually lost, nominal?

Telegraph_Sam wrote: »

the choice of fund to move to, was not based on a full-blown written report but rather on the discussions between us at the time which I believe have been recorded in their files. I stated my objectives, they proposed the solution.

They presumably proposed a solution from the range of solutions available within the product you had chosen to buy? And not by the full range of solutions you might have felt were available which include you taking the cash out and paying product penalties(up to 100%) and potentially taxes and HMRC fines if it is a pension you're trying to take early, before going and finding a high street bank account to save the residual amount into (or, perhaps, a charges-free under-the-mattress solution).

If taking the cash out of their product was not an option based on their T&Cs or regulations, you are going to be stuck with the 'best of a bad bunch'. One option is usually to move to another provider but all cash funds have fees, and you can't expect them to recommend a move to a rival if you have not engaged them for independent advice.

In summary, you calling the equities and bond markets wrong and failing to increase your pot by 50%+ over the last few years as others might have done, by choosing to sit in the nearest thing they have to a cash equivalent instead, is not their concern, nor the ombudsman's, nor the regulator's.

With the sorry state of the media these days, they would probably love to do a sensationalist piece on how vulnerable people who can't be trusted to understand financial products, may buy inappropriate financial products. And maybe for maximum sensationalism of the article, if you don't mind the embarassment, you can tell them you consider yourself to be "reasonably financially clued up". Clearly, no disrespect intended, you are not.

I said to them that I wanted to put my accumulated savings in a "box" where in return for sacrificing the upside I could be sure that the downside would be eliminated

Typically, this is broadly what a cash fund does. It is not designed to make money in real or nominal terms after fees, it is simply designed to avoid downside investment risk. This is actually more difficult than you might think - if you or I put 85 thousand in a bank, we get compensation scheme protection if the bank goes bust. An institutional investor like your pension or life insurance provider investing 85 million does not.

The fact that the value has actually declined in nominal let alone real terms just adds salt to the wounds and implies that the company is incapable of managing funds, given the constraints, in a cost-effective manner.

They have a business to run: offices, systems, employees, regulatory compliance. Your constraints are that you cannot take any investment risk whatsoever. Based on your goals, of not daring to do anything with the cash that could lose its value, all true investment options are eliminated. Even structured products which sacrifice investment income to buy insurance against a decline in value should be eliminated, because the insurance isn't free, and you may lose money, even before they look at charging you fees, as the fee-paying customer you are.

So, you have to accept that you are asking them to hold your cash in safe custody, run a business, and try to give you back the same amount of cash. You can't expect the business to be run for nothing nor be free to you the consumer. Therefore the constraints that you are trying to impose are presumably that they must somehow make a return greater than the inter-bank offer rate while having a cost/fee base lower than that amount.

It is hard to beat the market average return, or to run a business on a shoestring. Market average cash returns are set by the market, not by your insurance or pension provider; the cost/fee base is agreed by you up front when buying the product. In times of unprecedented all-time-low UK interest rates, you might find that the income does not beat the agreed costs, through no fault of the provider.

See what the response is - in fairness to them this has yet to be stated.

True, but I think everyone here would be surprised to see if their response was not along the lines we have suggested.

Telegraph_Sam

I think you are reading post hoc considerably more expertise and distinctions into the discussions than what happened in practice, and of course it is easy to be wise after the event. I was given to understand, implicitly if not explicitly, that by moving into their deposit fund I would at the very least be protected from losses, and could anticipate a return on a par with other "deposit" accounts available to Joe Public. The implication is that the insurance co is incapable of (and therefore should not be expected to) manage "deposit" funds as "efficiently" as the average bank manages instant access accounts - which to the layman not versed in the fine detail is quite a surprise if not an indictment.

marathonic

Telegraph_Sam wrote: »

I think you are reading post hoc considerably more expertise and distinctions into the discussions than what happened in practice, and of course it is easy to be wise after the event. I was given to understand, implicitly if not explicitly, that by moving into their deposit fund I would at the very least be protected from losses, and could anticipate a return on a par with other "deposit" accounts available to Joe Public. The implication is that the insurance co is incapable of (and therefore should not be expected to) manage "deposit" funds as "efficiently" as the average bank manages instant access accounts - which to the layman not versed in the fine detail is quite a surprise if not an indictment.

Again, you're over-complicating things. It sounds like you're trying to chat in some sort of legal language about what is, in reality, a pretty straightforward situation.

It's not that the insurance company is incapable of managing deposits as efficiently as banks. The key point about the banks products is that they are loss-leaders.

Take Nationwide as an example. They offer 5% on funds of up to £2,500 - or a maximum of £125 per year before tax is deducted. They lose money on this but are willing to do it because a large number of the people that open the account won't switch when the rate drops and will obtain Nationwide credit cards, loans, mortgages, etc.

Have a thought as to what Nationwides response would be if your pension company went in and asked could they deposit £100,000,000 in their 5% FlexDirect account :rotfl:

Telegraph_Sam

I really don't believe that a layman expecting some sort of a non-negative return over 3 years from a "deposit" account can be interpreted as making things either over-complicated or legal!!! How the various financial instititions go about offering this - and why the insurance companies should be any different from the banks and building societies or indeed a special case such that investors should be prepared to put up with different standards (are you telling me that insurance cos don't earn £££'s from their endowment and life and general insurance policies??) - should in an open market not need to be the concern of the policy-holder or investor. What is different of course is that the policy holder is in practice locked in whilst if my bank or building society drops the rate uncompetitively then I am free to take my business elsewhere. It is difficult to convince oneself that the insurance companies are not taking advantage of this.
[with this logic Waitrose would go winge-ing to the Trading Standards people because Tesco & co were using loss leaders in the time-honoured fashion. Sorry, doesn't wear. It goes by the name of competition]

bowlhead99

If I bank with Nationwide or Lloyds or Santander, they try to give me good interest rates - whether they prefer to do this in current account or savings account or both- because:

a) they know that I am bringing in new income every month and their whole raison d'etre is to take deposits to allow them to lend out, so they want to get in a position where all my salary is going through them and their current and deposit acounts become the automatic first choice for any of my new pennies that need a home;

b) once established at the core of my financial life, they know they will be really well placed to cross-sell insurance, loans, mortgages, investments etc because:

- rightly or wrongly I'll expect mortgage and loan applications wll have the best chance of going through at my own bank because they know me and my financial condition and another rival institution can only see limited credit ref agency stuff

- if I'm visiting my own bank or its website daily or weekly then when I want some insurance or a credit card I will at least read what they have to sell, through dumb blind loyalty or laziness, because my home bank is the hub of my financial world. That's why Nationwide or Lloyds or Santander or whomever will give good current account interest rates only if you use them as a 'main account' with minimum monthly deposits, direct debits etc. The high interest rate is only worth it to them if they can take that position as the hub of your financial world.

Compare this to a pension or insurance product's "cash account".

a) the assets I have for my retirement with an insurance company or pension provider are a broadly fixed pool, a segregated set of assets put aside for my retirement away from my own day to day living. And they are already managing those assets.

If they offer slightly improved 'deposit rates' I am not going to suddenly deposit more - there is no concept of me giving them a bit more money this month to look after and then taking it back next month and spending it. They already have as much money in the defined investment pot which is set aside from the rest of my life, as I want to give them.

So I can't put more into the cash fund without pulling it out of the other equity and bond funds I already have with them. Statistically those non-cash funds they manage would earn higher average returns over time and so grow faster and eventually earn them more fees, so they don't want to discourage me from keeping those funds high and the cash funds low.

b) unlike a bank they cannot be at the core of my financial life because

- any new money I have coming in each month is not going to go into their accounts by default

- unlike a bank I have no reason to engage with them daily or weekly to monitor my day to day spending or deposit cash over the counter. With the retirement product I am either still contributing (in a passive way such as by direct debit) or I am no longer contributing, but either way, it is "set and forget", and I am only going to look in once every year or more. Your example bears this out because you only noticed after three years that the return was not great. You literally didn't engage with them for a thousand days.

The cross-selling opportunities from that sort of relationship are woeful compared to actually being someone's main bank account and the hub of someone's financial life. Sure, the fact you log on to their site every 1-3 years means they are a brand name you recognise, but you'll see other providers daily in magazines and on TV: the grating TV adverts and jingles will stick in your mind when you need another product, more than the logo of the company that sends you a letter once a year. So the retirement product provider which you rarely engage with, won't be your go-to place for getting a mortgage or credit card or car insurance, even though they may sell those things.

So to summarise:

- a cash fund within the fund range offered by a pension provider is not going to offer market leading returns because it cannot be a loss leader for other stuff because they are not going to be able to reliably cross-sell other stuff.

- and a high rate in itself will not get them more assets in the door because the customer has already decided how much they are going to put into the overall retirement portfolio. They don't want to take a loss on the cash accounts and make the loss-making subsidised cash accounts more attractive to you than the profit-making equity and bond accounts.

- Safe instiutional cash deposits pay low rates and a cash fund within the fund range offered by a pension provider is designed for temporary storage of assets without taking investment risk, and though it costs money to run because they don't give you anything for free, as long it doesn't lose several percent each year in nominal terms it has broadly achieved that goal.

Basically, you told the company you wanted to turn off the exposure to investment risk and they did. The fund should not have experienced any investment losses and I would be surprised if it has. Your assets stopped being invested in anything that could produce a real terms return and sat on deposit. After fees, you are marginally down.

You misinterpreted what the returns might be, and hoped that cash on deposit inside a pension wrapper would give an equivalent return to the "better online instant access savings accounts" you have seen. Taking cash out of the wrapper and putting into one of those accounts was presumably not something you could or would have done, even if you had known then what Marathonic and I have told you now. So the market leading rates or even market average rates are not relevant - if you're including bank savings account deposits in 'the market'. Instead you should only be comparing with sterling short term "money market" deposits net of pension fund-style fees.

See screenshot from trustnet.com below. I have deliberately pulled out the performance of 3 funds which have lost money over the last year or so, so that you can see it's perfectly possible for cash deposit funds to lose after fees, with a range of providers. There are of course some that made money on a 3-year view but the pension fund 'money market fund' sector average is under 1% total for the last 3 years.

You still haven't told us how much you have lost. If you don't want to give actual pounds and pence, what was the percentage?

IronWolf

The rates on bank accounts is irrelevant. Pension funds dont put cash into bank accounts it is too high risk that the financial institution will fail. Cash will be invested in money market funds which invest in short term government securities. The interest rates on these are very low currently.

jem16

Telegraph_Sam wrote: »

I stated my objectives, they proposed the solution.

From reading the most recent replies, it seems that the insurance company has given you what you asked for within the confines of their products.

Unfortunately it seems that you have misunderstood what this meant. I seriously doubt you will get anywhere with your complaint.