How to assess your pension’s performance

The majority of us don’t keep that close an eye on how our pension funds are performing. You may cast a quick glance over the annual statement from your pension provider and see that your funds are outperforming their benchmark, but that is about it.

Unfortunately, it turns out you can’t trust what you read. Research by the University of Bath has revealed that while most personal pension funds generally beat their benchmarks that is less down to the investment skills of pension managers and more to do with the fact benchmarks are chosen that are easy to outperform.

A pension fund specialising in UK equity, for example, could outperform its benchmark by three per cent to four per cent simply by adopting a passive strategy - that is, simply replicating the underlying performance of the index itself - and investing four-fifths of the money in the FTSE benchmark and the rest in an emerging market equity index.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

“This study provides convincing evidence that pension funds are reporting their performance in relation to benchmarks which are not reflective of their true investment profile,” says Ania Zalewska, Professor of Finance at the University of Bath’s School of Management. “It creates a spurious impression of good investment skills for consumers who are paying a premium for actively managed funds.”

When a new pension fund is created a Primary Prospectus Benchmark is chosen to compare the fund against. But the fund is often allowed to invest in a broader spectrum of assets than its official description and benchmark suggest.

Take a fund that is classified as UK equity, in fact it can invest up to 20 per cent of its assets under management in investments that fall beyond the scope of this sector. If the benchmark it is measured against is 100 per cent UK equity (e.g. the FTSE 100) then the fund has an advantage.

Alternatives

So, how should you measure your pension fund’s performance?

“The challenge is to determine what you compare their performance against,” says Patrick Connolly, a certified financial planner at Chase de Vere. The best approach is to compare it against several things.

You can compare your fund against the average performance of the peers in its sector. This can be a good “broad guide”, says Connolly. But given that the sector will contain funds with a broad spectrum of investment approaches it won’t give you a really accurate benchmark.

To make sure you are comparing like with like take the time to find other funds that are similar to yours. That is, funds that have the same aims and investment criteria. Once you’ve found them keep an eye on their performance and compare it with that of your own. If your fund starts to flounder while another strengthens look into the reasons why and if you aren’t convinced your fund will recover consider switching.

But, don’t get too obsessed with moving between funds. You are likely to incur costs whenever you move funds so take a long-term view and limit yourself to checking fund performance only a couple of times a year. Ultimately, what is most important is that the fund is providing the growth that meets your long-term objectives.