Pension Fund options

quickbeam

I was wondering if I could consult the minds of people who know more about this than me.

Currently 38 and my salary puts me in the 20% income tax bracket. I’ve been a member of my defined contribution company pension since 23 and have slowly been upping my % contributions to 11% pensionable salary with my employer adding a further 7% though this will be increased to 9% when I hit the big 40 which will take it to 20% total.

So far I’ve been invested in the default fund and have a 70K pot split between the following:

FUND NAME, (% charge including platform), [Investment %]

1.       BlackRock Aquila (50:50) Global Equity Index Fund (0.160) [45%] - Passive

2.       BlackRock Aquila Emerging Markets Index Fund (0.365) [5%] - Passive

3.       L&G Active Corporate Bond – All Stocks – Fund (0.335) [20%] - Active

4.       Skandia Standard Life Global Absolute Return Strategies Fund (0.825) [10%] Active

5.       Invesco Perpetual Global Targeted Returns Fund (0.825) [0%] Active

6.       Newton Real Return Fund (0.915) [10%] Active

7.       BlackRock DC Diversified Growth Fund (0.735) [10%]

8.       L&G Over 5 Year Index-Linked Gilts Index (0.175) [0%] - Passive

9.       L&G Over 15 Year Gilts Index (0.175) [0%] - Passive

10.   L&G Cash Fund (0.200) [0%] - Passive

At of the beginning of this year the default fund seems to have ditched the Skandia Standard Life Global Absolute Return Strategies Fund (can’t blame them it looked like it had awful performance) and has invested 30% in a blend of Invesco Perpetual Global Targeted Returns Fund, Newton Real Return Fund & BlackRock DC Diversified Growth Fund though the precise % of each fund can change the blended fund should add up to 30%.

The question I have is the performance of the actively managed funds tends to be very poor compared to the passively managed ones and has higher charges. What’s the advantage of them? Is it because they are not invested in shares in order to diversify my portfolio but are therefore more expensive to manage?

The above funds are my only options and I'm not at the stage where I need the protection of the L&G funds and as the GARS fund has been removed there are only 6 Funds to choose from. As I’m still relatively young would it make sense to put more into the emerging markets fund and put less into the 3 active funds or just leave things as they are? I’m not talking about moving the money that is already invested just reallocating my future contributions. 

Thanks for your time.

gm0

Well done you for finding the time to think about it at 38.  Family and career can so easily push this important but not urgent item to the side.  I don't have a fund allocation answer for you but I will tell you my experience from 35-55 and how my thinking about it changed with age.   Spoiler - I don't hold any EM in my employer pension scheme.  I wish I had educated about it a bit earlier and moved from a UK FTSE All Share TR tracker to a more global posture when I was younger.  But it was OK.  Actually it was better than OK when you look past the 50% dips. Now I look at the units I bought cheap. Then it was scary seeing half a pension fund on the next report (pre-web). But I am talking about global equities vs UK not EM.

As it goes - I don't think much of the EM offer in my pension fund - It has performed poorly overall and the extreme volatility has not been offset by long term extra performance vs developed equities. It is not popular.  In a fund supermarket setting with the core allocation established (I am now thinking about what that needs to look like for long term deaccumulation) - I might consider 10% EM for "interest" and a nod to the fact the world is changing. In theory EM is a no brainer - the reshaping of the world economy and the waves of hype about globalisation BRICS etc. (20 years ago).  China actually happened.  The others took different paths.  Yet jumping on it as a retail investor wasn't always a success).  See also Canals, Trains, Wool, Energy transition, Tulips, Web1.0 at various times).  Can be hard to access sensibly other than as a mug punter milked for a mediocre setup by a fund manager in a typical pension scheme setting.   In my scheme EM seemed to lag on the ups (somewhere was having a crisis) and when equities went south it did the same but a bit more.  Overlaid with some surges and noise.

My opinion - EM is a space where local market knowledge matters. Less liquid, more political and market structure risk.  Suggestive of active and I think I would want to choose the fund and fund manager very carefully to the specific emerging market accepting it's still a punt.  And that isn't going to be for sale in the typical employer pension.

Until I got more seriously into self education for managing in drawdown I hadn't really understood the fund fact sheets and the lingo of investment.  Arguably still don't fully. And how the performance reporting is such a shell game.  The unit price you can sell for x number of units and the published indexes are facts. The gain on the one (your money) relative to the other (market return - known as beta) for the asset classes you chose is what matters in checking what you are being told.  Most other reporting has "assumed standard charges" and related legerdemain such as carefully chosen reporting periods.  And new funds launch and restructure to obfuscate what is really happening when it threatens to pluck the funds under management goose due to !!!!!! results for you. 

Let it slide for so long that I languished in 100% UK All Share equities after I stopped contributing 2009 until sometime around Brexit.  I now subscribe to the view that more diversification (globally) is good for managing my risk in retirement and that a single country fund - even one with foreign earnings in it as from FTSE100 component of FTSE All Share is not diversified enough.  This is the one thing I would change about what I did if I had my time again.  Been more global earlier. Still no currency hedging.  Still 100% equities (due to 30saving+40 year retirement time horizon).  Still take maximum offered free money (employer matching).  Keep on saving rain or shine.  If alternatives, property (REITS) etc. had been available I would have looked at cost and performance to see if they were convincing.   I am not a "new and shiny" person - want to see results - so I likely would not have bought any of the new funds. 

This is my story. Some people will find 100% equities "too spicy" even with the time horizon as stated.  And that's fine.  Risk appetite (emotional and financial capacity is a real thing).  Personal circumstances health and dependents all change things. 
I don't use the DGF funds in my scheme either because I don't like not knowing whats is in it.   I also react poorly when I see expensive extra layers of fund management names in a fund structure.  L&G fund with Black Rock and Schroeders also getting a bite.  Some see more potential performance or improved performance/volatilty.  My nasty suspicious mind sees more obfuscation and fee layering and a calculated underperformance relative to beta to avoid too much hissing from the goose.

Albermarle

Normally a default fund is fixed by the company and you can not play around with the funds inside it ? Your post seems to indicate this is possible ?
What you can normally do is invest in funds outside of the default fund altogether . 

AnotherJoe

OP probably means the default investments held if you dont choose.

quickbeam

Thank you for your response gmo lots of things to think about there. 

Albermarle, Anouther Joe is correct I can’t choose which funds my company allows me to invest in but I can choose what % of my monthly contributions go into each.
The money paid into my company pension currently goes into the default fund as follows:

1.       BlackRock Aquila (50:50) Global Equity Index Fund [45%]

2.       BlackRock Aquila Emerging Markets Index Fund [5%]

3.       L&G Active Corporate Bond – All Stocks – Fund [20%]

5.       Invesco Perpetual Global Targeted Returns Fund [10%]

6.       Newton Real Return Fund [10%]

7.       BlackRock DC Diversified Growth Fund [10%]

But I am wondering if it would make more sense to change my allocations given my age.

The other thing I find difficult to know is how the funds are performing on a like for like basis e.g. the Skandia Standard Life Global Absolute Return Strategies Fund has been diched by the company pension trustees I'm assuming due to bad performance but were there other funds that had the same goals but did better. The company DC scheme always feels like a bit of an afterthought as the company manage a large final salary scheme (I missed joining it by 2 years) so I never know if the funds they allow me to invest in are a good selection or not.

In order to get the maximum contribution from my company I only need to put in 5% of my salary but as I can afford to put 11% towards my pension is it best to put it all in the company scheme or would it be better to put my extra 6% somewhere else? Our household has no debts apart from the mortgage and we have a savings buffer to cover redundancies and the unexpected etc..

Regards

Albermarle

But I am wondering if it would make more sense to change my allocations given my age

Normally the advice is to have a  higher equity allocation than this at your age . How much higher is down to your risk tolerance ( as the more % equity , the more volatility)

In order to get the maximum contribution from my company I only need to put in 5% of my salary but as I can afford to put 11% towards my pension is it best to put it all in the company scheme or would it be better to put my extra 6% somewhere else? 

It depends on how your contributions are taken from your salary . If it is by salary sacrifice , it is better to stay with the workplace pension, due to the NI benefit.  If by other means then it would be up to you , if you wanted to open a separate pension.

The charges on your pension are pretty competitive, so probably you will not save anything much on charges by opening another pension, possible the opposite.

AnotherJoe

quickbeam said:

Thank you for your response gmo lots of things to think about there. 

Albermarle, Anouther Joe is correct I can’t choose which funds my company allows me to invest in but I can choose what % of my monthly contributions go into each.

The money paid into my company pension currently goes into the default fund as follows:

1.       BlackRock Aquila (50:50) Global Equity Index Fund [45%]

2.       BlackRock Aquila Emerging Markets Index Fund [5%]

3.       L&G Active Corporate Bond – All Stocks – Fund [20%]

5.       Invesco Perpetual Global Targeted Returns Fund [10%]

6.       Newton Real Return Fund [10%]

7.       BlackRock DC Diversified Growth Fund [10%]

But I am wondering if it would make more sense to change my allocations given my age.

The other thing I find difficult to know is how the funds are performing on a like for like basis e.g. the Skandia Standard Life Global Absolute Return Strategies Fund has been diched by the company pension trustees I'm assuming due to bad performance but were there other funds that had the same goals but did better. The company DC scheme always feels like a bit of an afterthought as the company manage a large final salary scheme (I missed joining it by 2 years) so I never know if the funds they allow me to invest in are a good selection or not.

In order to get the maximum contribution from my company I only need to put in 5% of my salary but as I can afford to put 11% towards my pension is it best to put it all in the company scheme or would it be better to put my extra 6% somewhere else? Our household has no debts apart from the mortgage and we have a savings buffer to cover redundancies and the unexpected etc..

Regards

IMO thats a very poor selection of funds. I dont believe any of them have any redeeming features.

I would ask if they can add a low cost global index tracker. Probably wont make any difference but dont ask dont get.

If you dont get, I'd look at seeing if you are able to occasionally transfer out from this dismal selection into a SIPP of your own and go for yes you guessed it a  low cost global tracker.

And in the meantime for sure I'd put the extra 6% into a SIPP of your own that is a low cost global tracker

And if they wont let you transfer out I'd go 90% Aquila, 10% EM. Through gritted teeth.

quickbeam

Thanks for your replies Another Joe and Albermarle. I'm back at work next week after shutdown so will ask abut the global index tracker. As you say the worst they can say is no.

Regards