Invest pension fund in a bank account?

eemy_2

Hello there. I've just recieved the annual update on my company's final salary pension scheme and it doesn't look very good.

The fund is around £300m and the investment return was just 4.5% with investments costs of almost £1m. Contributions to the scheme are currently 50% greater than the money being paid out to pensioners and the entire fund is in surplus.

My question is can a company pension fund be placed with a bank and potentially get an 8% return, with no investment costs and very little risk attached to it?

dunstonh

My question is can a company pension fund be placed with a bank and potentially get an 8% return, with no investment costs and very little risk attached to it?

They would have access to institutional funds and cash accounts but they would be at risk of being accused of wasting money if they did that.

First of all, they wouldnt get 8% and the long term average with conventional investments would be expected to return in excess of 10% p.a.

A difference of 2% a year over 35 years can double the fund value. Using cash accounts for 100% of the fund can do far more damage than the odd bad year on the markets.

EdInvestor

Don't forget the fund is already getting dividend and interest income from its investments in shares and bonds/gilts, both of which (unlike cash) offer the propects of long term capital growth as well.

jonathon_hart

Hi.

As it is a Final Salary scheme then it is up to the company backing the scheme to ensure there is enough money to pay your pension in the scheme. Your pension is a guaranteed amount.

Therefore the investment return (or lack thereof) is the company's problem, not yours. You will get the same regardless of the investment return.

Thanks

Debt_Free_Chick

eemy wrote: »

The fund is around £300m and the investment return was just 4.5% with investments costs of almost £1m.

In what type of assets/funds is it invested? Look in the notes the accounts ... around about note 10 or so. It will describe the funds and state whether they're equities or bonds. There should also be a separate investment report within the annual report - the trustees should have commented on the investment return, in particular how the performance measures up against the benchmark.

Contributions to the scheme are currently 50% greater than the money being paid out to pensioners and the entire fund is in surplus.

Do you really mean that it's in surplus i.e. that the value of the assets exceed the liabilities? If so, then perhaps the trustees have moved the assets to fixed interest (gilts & bonds). Some do this to avoid the risk of being invested in equities - but the result is generally a lower return

My question is can a company pension fund be placed with a bank and potentially get an 8% return, with no investment costs and very little risk attached to it?

Yes they can - but cash is far, far from "risk free" for a pension scheme. Firstly, inflation risk. Most of the pension promises are inflation-linked (at least partly). The deferred pensions for former members increase in line with inflation and pensions being paid to pensioners, increase in line with inflation. Investing in cash would mean that, over time, the liabilities for these groups of members would grow to be more than the amount of cash held.

Pension promises for current employees are "salary linked" - again, the value of these promises would grow to be more than the cash held.

Cash is not risk free