A year later and auto-enrolment has continued to roll along and now incorporates 10m members. But the Sipp market has been hit with reputational issues, and the self-employed remain locked out of workplace pensions, with few obvious solutions on the horizon.
Research published last year by the Association of Independent Professionals and the Self-Employed, entitled ‘How to solve the self-employed pensions crisis’, found that although two-thirds of self-employed people are concerned about meeting financial needs in later life, little more than a third would stick with AE were they to be part of that initiative.
Scott Gallacher, chartered financial planner at Rowley Turton, describes the idea of rolling out AE to the self-employed as an “oxymoron.” He says: “I’m not sure how you can introduce AE for the self-employed, because the whole point is the employee does nothing and magically your employer sets up a pension scheme and pays into it.
“The self-employed person [would have] to set up a pension scheme and there’s no employer to pay into it. It’s compulsory pension contributions, which is fine, but I think they have to be a bit more honest about what it is.”
As a result, there is still a growing part of the population that must turn to private pensions to help save for their retirement; whether that means traditional personal pensions is another matter. Either way, the need for people to save for retirement, whether self-employed or otherwise, has never been greater.
The state pension age has been equalised at age 66 for both men and women, and will rise to 68 over the coming years. And while recent research has suggested UK life expectancy improvements are grinding to a halt, the average person will live far beyond the state retirement age. This means that unless a substantial retirement pot is accumulated, people will have to choose between continuing to work or retiring with less.
According to Susan Hill, chartered financial planner at Susan Hill Financial Planning, one problem with current saving attitudes is that immediate gratification seems to take precedence over long-term financial security.
She says: “How many people do you know who pay more than £100 on a monthly phone contract so they have the latest model, but don’t put anywhere near that amount into their pension? It was once called the ‘takeaway pension’. How much do you pay on average on takeaways in a week – if you put your takeaways into a pension, how much income would that give you at retirement?”
Other initiatives have also attempted to bridge the retirement savings gap. But as discussed in this survey last year, the Lifetime Isa has had little to no impact on the personal pensions market. In fact, the Lisa’s own future has been hanging in the balance, with a number of MPs calling for the product to be canned in response to its muted take-up.
As an example, the IPSE data currently shows that 31 per cent of the self-employed are contributing to a pension, with 33 per cent funding an Isa, and just 2 per cent making payments into a Lisa.
With-profits
The growth of the Sipp and AE markets, coupled with regulatory changes that mean providers no longer have to publish with-profits performance data for legacy contracts, means our annual personal pensions survey has been shrinking in recent years. But the providers that have taken part reveal some interesting data that helps shed light on the current state of the market.
With-profits itself is very much undergoing a makeover, with Prudential and Aviva both offering products that stick to the with-profits ethos of smoothed returns, while removing terminal bonuses and market value reductions to offer greater consistency and transparency. However, for this survey we focus on the performance of traditional with-profits within personal pensions, and in particular how those funds have fared over a variety of timeframes.
These products come in two types – conventional and unitised. Put simply, the latter buys units in with-profits funds.
Table 3 shows the results for a £200 per month investment. The fact that only three plans can provide performance data over five years provides further evidence of the dwindling popularity of with-profits. That said, all of these providers (Prudential, Standard Life and Wesleyan) have delivered returns above 5.5 per cent per year. They have certainly been helped by the fertility of investment conditions over this period, but the data also shows with-profits can provide an attractive alternative to cash for cautious investors.
Performance over longer time periods is also encouraging, with average growth topping 6 per cent across both 10 and 15 years, and 5.7 per cent over 20 years. Some, however, have struggled. Phoenix SAL and National Provident (also now administered by Phoenix) have only mustered annual returns of 1.7 per cent and 2 per cent, respectively, over 20 years.
To highlight the impact this can have on the accumulated fund, putting £200 a month in to the best performer over this period, Scottish Mutual (another administered by Phoenix), would have amassed a fund of £106,292, almost double that of Phoenix SAL’s conventional plan (£57,345).The principal reason for the latter’s struggles is that it is the only fund not to offer a terminal bonus in any shape or form.
With-profits funds grow with the additional of annual and terminal bonuses, and although neither is compulsory, most funds should see at least some uptick year on year. The average terminal bonus for funds over 20 years is £29,798, with one exceeding £50,000. Ironically, this is the unitised version of Phoenix SAL.
Similar performance data is shown in Table 4, but this time focusing on a single investment of £10,000. Wesleyan’s fund is a notable performer across 15 years, mustering average annual growth of 8.5 per cent and a total amount £3,265 higher than this time last year. The standout performer over 10 years is Standard Life’s Stakeholder Pension plan, which, despite not applying any terminal bonus, would have turned a £10,000 investment into £22,221 – annual growth of over 8 per cent.
National Provident once again provides a useful case in point to highlight the pitfalls of with-profits across longer investment periods. A £10,000 single outlay would only have increased to £13,848 over 20 years – the worst performer by some distance. But average fund growth of 5.4 per cent proves this is an exception. The majority will have satisfied most investors.
Although with-profits is clearly out of favour as a concept, advisers still see its merits for certain scenarios. One clear benefit is most plans will not apply a MVR on an investor’s set retirement date, which can be particularly useful for those concerned about markets slumping shortly before a fund is due to be crystallised. It should be noted, however, that terminal bonuses can still be adjusted – so a drop in the fund value is still feasible in such circumstances.
The limited appetite for personal pensions is underlined by the fact that just three of those plans included in the survey are still open for new business. Nonetheless, retirement savings in general continue to form the bulk of adviser business, particularly in an era of pension transfers. Ms Hill says that around 75 per cent of her business is pension-related.
Out of reach
Moreover, Mr Gallacher will not be alone in suggesting that AE has shifted some of those who may need advice out of the industry’s reach. But he concedes that many of this group were probably not being well serviced by financial advisers because of the advice gap.
“We still use pension contributions, but typically we’re dealing with wealthier older people who want more control of their money, sometimes using traditional with-profits funds that have more protection than, say, AE pension schemes, or the flexibility offered by Sipps and [small self-administered schemes],” he says.
“The need for people to see an adviser to start paying into a pension, as their employer doesn’t offer one, has disappeared now.”
Ms Hill says there are still problems to be resolved: “Gone are the days when the maximum starting contribution was 17.5 per cent of earnings, but this is where most people should start. There could be a future problem when we may have a class of worker who has little or no personal provision and isn’t entitled to the full state pension.”
She notes that those who take an employment break to raise children run the risk of putting themselves at a particular disadvantage because of how such decisions may affect their personal, company and state pensions.
Mixing things up
Personal pensions, then, still have a role to play for some, and they can be used to invest in a range of other funds and assets aside from with-profits. Table A shows the individual fund performance by all providers, and we have listed the top five performers in each timeframe in Table 1. A round-up of the sector results can be found in Table 2.
Overall, the figures are somewhat lower than last year, and there are two fundamental reasons for this. The first is that markets, after a good run over the previous decade, endured tougher times in 2018, with many experiencing sharp falls. The second reason is that the number of funds we have analysed is lower. Royal London, which has historically featured highly in the ranks of the top-performing funds, only provided figures for one plan this year.
In last year’s survey, funds investing in North American equities dominated the top five positions, and although they feature highly again, overall the market struggles over the past 12 months have seen performance fall compared with last year.
Unsurprisingly, many of the same names continue to crop in a number of categories. For monthly premiums of £200, the North American equity funds by Prudential, Standard Life and St James’s Place feature in every category. Prudential also has the sole global emerging markets fund to make its way into Table A, and notably the vehicle was the best performer over 20 years with average annual growth of 9.4 per cent – for both a £200-per-month regular investment and a single payment of £10,000.
Perhaps the most eye-catching result is from Standard Life’s UK Smaller Companies fund. A standalone contribution of £10,000 15 years ago would have increased to £66,395, substantially higher than the second-best performer.
Two property offerings are also included in the table – both are administered by Phoenix Life and have returned 6.5 per cent a year from a £10,000 lump sum across 20 years.
A key factor behind fund performance is asset allocation. The difference between with-profits and the average fund in the Investment Association’s Mixed Investment 40-85% Shares sector is shown in Chart 1.
Unsurprisingly, given their more cautious approach, with-profits funds hold significantly less in equities, and more in fixed interest securities and property. Mixed investment funds allocate around two-thirds to equities, whereas the average with-profits product holds just over 40 per cent. Still, it is notable that even these funds have started to shift away from both gilts and corporate bonds over the past 12 months.
Changing of the guard
The future landscape of personal pensions will almost certainly involve a smaller market. Despite recent reputational issues, the growth of low-cost, easy-access Sipps – some of which can now be managed on a smartphone if need be – is another factor that is ensuring the tide remains out for personal pensions.
There is an obvious broader theme that unites these disparate types of pensions provision: encouraging people, whether employed or self-employed, to save for their retirement.
But it looks increasingly unlikely that AE’s success for the former will be replicated for the latter – and that means this part of the retirement savings market remains a question mark for advisers and providers of all kinds.
