A 23-page report published by wealth management firm Bestinvest exposed the widespread use of mirror funds by the pension industry, which often puts personal pension clients into copies of well-known funds.
The report compared the returns on five well-known funds – Artemis Income, Fidelity South East Asia, Schroder Tokyo, M&G Corporate Bond Fund and Axa Framlington UK Select Opportunities – with the performance of mirror funds over different time frames.
It found that 92 per cent of the mirror funds generated a lower return than the original fund.
The report found implicit charges by pension providers, differences in the cash allocation and ever-changing fund sizes contributed to the poorer performance of mirror funds.
David Smith, wealth management director at Bestinvest, said: “While the examples we have provided are all for underlying funds we rate highly, if you hold a mirror fund based on an underlying ‘dog’ fund, you are potentially suffering a double whammy of dismal performance.”
The report advised clients to phone their pension provider to ascertain what charges were being deducted from their funds. It also recommended that clients invest in self-invested personal pensions to gain direct access to the real funds, although it stressed that Sipps may have costs “in addition” to charges levied on the funds that must be compared.
Mr Smith added: “Sipps are well positioned for the greater flexibility afforded by the government’s pension reforms, such as the ability to draw down lump sums as and when required. In contrast, we expect many older personal pension contracts are unlikely to offer such flexibility.”
Matthew Walne, managing director of Leicestershire-based Santorini Financial Planning, said: “I do not know who would still use a pension provider’s version of a fund these days when open architecture on platforms exists. It would be nearly impossible for any fund to replicate the real deal because they rely on historic fund holdings and do not update daily.”