Pension fund price tag...
So what does make a high-quality pension fund?
Over the past couple of weeks, I’ve given you four signs to watch out for…
…and one red herring, which is the performance of the fund during good times.
Today I’d like to give you one other indicator you should avoid, because it’s terribly misleading.
And that’s price, or rather management fees.
We have a funny relationship with price, us humans.
Think about it. Some people equate expensive with “good” and cheap with “bad”.
Others take the exact opposite approach. Expensive is “bad”, cheap is “good”.
Either way, most of us instinctively judge the quality of products by their price tag.
The problem with this is that there is often very little correlation between price and quality. I’ll give you two examples.
Forget about the price tag
You can pay £14.50 for a bottle, £100, or upwards of £600.
And guess what? The product is always exactly the same. The process for making vodka is identical in every case. The only difference is the branding and marketing, which is what you are paying for at the top end.
Let's take another example again from the realm of food (you can tell my wife is a chef).
For years, people bought cheap meat at the supermarket because they considered it to be value-for-money - that is, a good purchase.
Then the horse meat scandal struck, and there was a rush back to the high street butcher, who could tell you exactly where their meat was sourced from.
Suddenly, meat which had seemed like an over-priced rip-off just a few weeks earlier was now identified as a sensible purchase, worth every penny.
The meat hadn’t changed at all, but the perception of what it was worth had shifted.
So what's my point?
It’s hard to judge whether something really is a good deal based on price alone.
The same is true with pension funds.
Over the past few years there has been a race to the bottom in terms of management fees.
The total charge for the default fund of a DC qualifying workplace pension scheme is capped at 0.75%, and many products are priced at a lot lower.
Many companies are drawn to the cheapest products because their perception is that these offer the best value-for-money and that with reduced costs, they’ll get their employees the most bang-for-their-pound.
Others take a different approach and prefer premium products, because they believe they’ll be better managed and… yes, get their employees better returns.
None of it necessarily follows, though.
Some cheap funds are great. Others are cheap because the pension companies aren’t managing them closely. Your employees can end up worse off.
Sadly, more expensive funds don’t guarantee better performance either...or worse performance.
There’s simply no relationship.
The search for a quality pension fund has to be divorced from price.
4 main factors...
...to consider, and they’re the ones I talked about two weeks ago here:
Are assets actively allocated?
What proportion is being actively managed?
Is there broad diversification of assets?
Is the fund beating inflation, and is this one of its goals?
And that’s it.
If you’re not sure how your DC default fund scores on these counts – and therefore, whether it is a sound investment…
…or if you’re in the market for a new pension fund, but are not sure how to judge the quality of what’s on offer…
We can help you assess whether your DC default pension fund is delivering true value-for-money, ignoring all the red herrings…making sure you’re not paying the equivalent of £600 for a simple bottle of vodka…and that you’re not being deceived about what you’re buying, like with supermarket meat in 2013.
Topics: Pension Investment