Personal PensionFeb 20 2012

Personal pensions – latest results

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Fact of the matter is, all of the bad news does little to encourage the average person to invest. Add to that all of the redundancies taken place, frozen wages and high inflation, and you have a country full of people who would rather spend the money that they have on the necessities of life, and perhaps a few luxuries, rather than pile it into a pension plan where it will be locked up until they reach retirement age.

No matter that now might be a buying opportunity because some investments are cheap and the prospect of long term growth looks promising. People want jam to day, not tomorrow.

But for those who do want to put money away for the future and take advantage of the tax breaks that a pension plan provides, where should they invest?

With profits results

With profits pensions have a long history but their prevalence in the market is dwindling as policies mature and the world turns to unit linked pensions. Once the cornerstone of the industry with the addition of guaranteed annuity rates, the number of providers still offering with profits pensions, these days the unitised variant, is very few.

Nevertheless, because there are still billions of pounds invested in with profits funds through endowments and pensions, this market still has a lot of importance.

A year ago, we tried to find out just how many with profits pensions were still in force but came up against a lot of resistance to our efforts. However, the little information that we were able to collect showed that there are more than 1m policies in force across seven providers: Alba Life, Britannic, Guardian/Scottish Equitable, Pearl Assurance, Scottish Life, Scottish Widows and Standard Life. Given that this was only a handful providers, the number of actual policies in force is surely much larger.

Table 1 shows actual results for with profits personal pensions, after all charges, over 5, 10, 15 and 20 years for regular contributions of £200 pm gross for policies maturing on 1 January 2012. Performance data for firms that declined to complete our survey are as at 1 March 2011, having come from the latest Forms 59A and 59B of their FSA returns.

The results shown in the Table use the commission levels and charges that applied to the bulk of the companies’ business at the time that the policies were taken out.

While everyone thinks that the with profits sector as a whole delivers bad news on the doorstep year after year with respect to payouts, the reality is that there is a fairly even split between those policies that are better than last year and those that are worse.

This survey marks a change in the list of companies that it covers because Friends Life, the new parent company of Friends Provident, acquired the closed life business of Axa and consolidated its business into its own. Because the with profits funds have been merged, they are now listed as Friends Life Company and Friends Life Limited, rather than Friends Provident, Axa Equity & Law and Axa Sun Life.

For five year policies the average payout is up by a miniscule £284 compared to our October survey, to £13,533 from £13,249. All but two providers paid a terminal bonus, which likely helped given that, back in 2010, roughly half the providers did not.

The good news continues for 10 year policies, where the average payout for all providers is up £1,932, to 30,434 from £28,502.

Despite the increased payouts, one provider was unable to beat the gross outlay. Scottish Mutual fell short of returning the contributions paid during the term with a maturity value of £17,087, which is also below the outlay net of basic rate tax.

Over 15 years the average payout of £47,227 among providers has increased by £503 in the past 12 months, although it is only £69 higher than what we reported in our October 2011 survey. The biggest increase by a wide margin comes from Phoenix & London at £5,682 compared to our figures in the October survey.

When it comes to 20 year policies, the average payout of £82,204 is lower than our previous survey by £1,570. A few providers reported deep cuts to their payouts, some by more than £9,000. Scottish Life was down £9180, Scottish Provident was down £9,041 and Guardian was down £8,786.

Few providers reported generous increases this year, although a few had some good news to share. Norwich Union’s 20 year payout, for example, was up by £5,220.

Even if these growth rates look less than salubrious, one point to remember is that they are based on gross contributions, meaning the amount that the policyholder contributed along with HMRC’s payment to the pension provider. The returns, therefore, are somewhat understated.

Table 2 shows the actual results after all charges for with profits pensions maturing on 1 January 2012 over 5, 10, 15 and 20 years for single contributions of £10,000 gross after all charges. Like Table 1 above, figures for closed life insurers that did not complete our questionnaire are taken from Forms 59A and 59B of the FSA return from 1 March 2011.

The best performing fund in the Table for five year policies is Friends Life Company, paying £13,365. This includes a terminal bonus of £2,227, which represents nearly 17% of the total payout. This policy is the former Axa Sun Life with profits fund, which was taken over by Friends Life last year and the name changed.

This year the average maturity value for 10 year policies increased slightly, to £15,163 compared to £14,413 for our October survey. Just five providers failed to pay a terminal bonus, which is an improvement on the seven that did not pay a bonus last year.

Prudential has the highest 10 year payout here at £19,033 and a large terminal bonus as well, at £5,038, amounting to 26.5% of the payout.

For 15 year policies the average payout has fallen slightly again, but only by a negligible £7; however, any decrease is bad news for policyholders no matter its scale. While most policies saw deep cuts, such as the £3,235 drop in value by Guardian, the positive story here is that Phoenix & London’s payout has jumped by £10,946 in the past six months. In our October survey, the provider’s 15 year payout fell by £10,835 to just £15,416.

Over 20 years, the same story of decreased average payouts continues. This time the average fell by £471 to £40,490 from £40,961 in October. A year ago the average payout was £41,795, so policyholders have little to cheer for.

Prudential is one of the few providers in this category to deliver good news to policyholders with its payout of £53,851. While this was not the most generous maturity value, which instead came from Gresham Life’s £61,018, it increased by £2,795 since October and came with a terminal bonus of £21,266, which accounts for nearly 40% of the payout.

Terminal bonuses in this category tend to be more generous than for policies with shorter term. For example, Guardian’s terminal bonus of £35,343 makes up 63% of the £56,133 payout, while Royal London’s terminal bonus of £26,129 makes up 57% of the £45,894 payout. However, this does not change the fact that Guardian’s payout is £7,589 less than it was six months ago, a 12% drop.

Unit linked results

Table 3 shows actual results, after all charges, for unit linked personal pension plans as at 1 January 2012 together with the annual growth rate (AGR). This Table is divided into individual sectors that match the ABI sectors shown in Money Management’s statistics pages to enable like for like comparisons. As with our October survey, these sectors reflect the new definitions applied to managed funds, which the ABI introduced in 2011.

Each year we ask pension providers not only to provide us with results for their own funds, but also for external fund links that they offer through their policies, but only a handful do this. As a result, the firms that provide us with this information – for the most part Friends Life, Scottish Widows, Legal & General, and Skandia – also tend to have the best results, but not always, than firms that only provided us with their own internally managed funds in the same sectors.

It should come as no surprise that the results are lower than in our survey six months ago, caused by a flagging global economy and a general flight to safety. As a result, equities are not doing so well, but fixed income funds, on the other hand, have seen their values increase as their popularity forces their prices up.

Quite easily the best two performing sectors in this survey are UK Gilt and UK Index Linked Gilts, which had an average return after 15 years of £56,801 and £61,708 for £200 pm contributions, respectively. This represents a 13% and 11.6% increase in the past six months.

One of the biggest losers has been the Global Emerging Markets sector, where the average payout after 15 years of £200 pm contributions among the four funds has fallen by £29,321, or 38%. Nevertheless, an investment in the Skandia/Invesco Perpetual Latin America fund 15 years ago would be worth £119,176 today, which is still an excellent return, albeit in exchange for a great deal of risk. Nevertheless, this result is worse than what the same fund produced six months ago, when it was worth £134,348, AGR 16%.

Just how bad the markets have been lately is partly illustrated by the number of funds that failed to match the gross outlay of £12,000. Out of 374 results, 43 funds returned less than the outlay. The sector with the worst record here is Europe ex UK, where 18 of 21 funds with results fell short of the mark. Japan funds were also hit hard.

European funds over the short term have produced disappointing results for regular and single premium investments, but over the longer term are more in line with their peers in the Global Equity and Mixed Investment sectors. The best fund of the bunch, like so many other occasions, is a Skandia offering, this time the Skandia/Fidelity European fund.

While over five years it made a loss – as nearly every European fund did – for 15 year policies it produces the best result in this category. Its £61,712 result over 15 years for regular contributions gives it a 6.8% AGR, which is not too bad given how poorly this sector has performed. Even better is its return on a £10,000 single contribution, which is £44,177, giving it a 10.4% AGR.

Like their European counterparts, North American funds have failed to return the gross outlay on several occasions. For five year policies at £200 pm it is not too far off the average, returning £12,626 compared to the average of £14,051, although it is still one of three funds to return less than £13,000. The others are Friends Life/Investec American, at £12,401 and Scottish Equitable’s internally managed fund, at £12,524.

But there is some good news in this sector as well. The Skandia/Schroder US Smaller Companies fund is among the top performers across all investment terms and stands out after 15 years of £200 pm contributions with an AGR of 9.2% and a result of £75,152. For a single contribution, its 15 year value is even better, at £49,734 and an AGR of 11.3%.

Considering all the North American funds in this survey together averaged 2.4% AGR after 15 years for regular premiums and 4.9% for single premiums in the same time period, the Schroder fund has shown that the US market is one where a good fund manager can find some luck and decent returns.

When investing in a pension the strategy is to aim for long term results and for many investors this means putting money into a fund that suits this aim. As a result, the ABI Balanced Managed sector, now eloquently named Mixed Investment 40-85% Shares, is where the bulk of pension savings goes and also has the largest representation of funds in this survey.

This sector has seen its average result for 15 years of £200 pm contributions fall in the past six months, to the tune of 5%, to £47,896 from £50,650, but this is a minor drop compared to other sectors. For example, the average result for Asia Pacific excluding Japan after 15 years fell by 11% (£10,202) in the same time period, while for Asia Pacific including Japan the drop was 18% (£11,501).

With profits vs unit linked

Table 4 shows the top five payouts with annual growth rates for with profits, Mixed (managed) funds and all unit linked sectors for the past 5, 10 and 15 years for both this survey and October 2011.

This Table makes it possible to compare how with profits, balanced managed funds and the full fund universe performed in this survey. While with profits continue to receive criticism for their falling maturity values, when it comes to the top performers for five and 10 year policies, they give unit linked pensions a run for their money.

For example, for five years policies with a £200 pm contribution, the with profits policy from Friends Life Company, with a payout of £15,212 beats the best balanced managed fund from Legal & General, which returned £14,066.

Across the board, there is little difference between with profits and balanced managed funds for regular contribution pensions over five, 10 and 15 years, as well as for single premiums over five and 10 years.

At 15 years for single contributions of £10,000 the gap between with profits and balanced managed funds becomes wider and the with profits policies gain the advantage. Like our survey in October, LV= has once again come tops in this battle with its payout of £34,056, which is £7,780 more than the best balanced managed fund’s return of £26,276, the Skandia/Newton Managed fund.

Where the best performance in the survey lies, however, is not in the balanced managed funds or the with profits policies. Rather, it is through investing in unit linked pensions across the wider ABI fund sectors.

And in an unsurprising scenario, the overwhelming majority of the best performers in Table 4 come from fund links to outside managers, rather than through the pension provider’s internal fund management team.

This is not only the case for regular contributions, where external manager fund performance over 10 and 15 years runs away from the balanced managed and with profits plans, but also for single contributions of £10,000. On many occasions the result is a payout that is more than double what could have been achieved with a with profits policy or balanced managed fund, which highlights the importance of making wise investment decisions.

The best performing sectors for unit linked results are, without much surprise, Asia Pacific excluding Japan, Global Emerging Markets and Specialist. But while the performance in these sectors has been head and shoulders above the rest, they also come with a great deal more risk, volatility and the possibility of losing capital, so any decision to invest here must be weighed against the client’s age, appetite for risk and ability to withstand a loss should the market fall.

Skandia makes the most appearances in the unit linked results with its numerous links to outside fund managers like Aberdeen, BlackRock, Fidelity and Invesco Perpetual. This, however, has as much to do with the fact that the fund managers produce attractive results as it does that Skandia is one of very few companies in this survey to provide results for so many of its fund links.

Even though Skandia has a stranglehold on the top five performing funds across five, 10 and 15 years, it also has its share of poor performers. The Skandia/Inveso Perpetual US Equity fund produces the worst result for single contributions of £10,000 over a 10 year term, returning £6,938, giving it an AGR of -3.6%. In fact, this fund sticks out as the most miserable performer in the North American sector, producing some of the lowest results across all investment terms and contribution levels.

Compared to the October survey, Skandia has seen its fund performance improve against that of its competitors and, as a result, has just one bottom feeding fund in this survey, as opposed to the 10 in October.

Conclusion

Turbulent financial markets have taken their toll on investment performance in the past few years and one area where it has been the most palpable has been in pension savings. Anyone who is at or nearing retirement right now will be faced with a smaller payout than just six months ago, let alone six years ago.

But despite all the bad news, there are good things to be found here. First, even though SIPPs are now considered to be the pension plan of choice for higher earners, a personal pension is still the best option for the average saver, particularly where smaller sums are being saved.

Second, given that personal pensions today come with tens, if not hundreds, of links to external fund managers, they have themselves become equally as flexible as many basic SIPPs, where the only investment option is into an open ended fund.

With a little shopping around and some decent fund research, a personal pension can be an affordable, flexible option that produces attractive investment returns in the long term.