Pension fund performance - do you monitor yours, how is it doing, do you actively change it?

[danlightbulb]

In 2020 during Covid when I had nothing to do, I thought I'd take a look at my pension fund.

I had never really given it a second thought before. It is a defined contribution employer scheme where the funds are taken salary sacrifice, and the provider they chose to run it picked the funds it was invested in, on what they term a 'lifestyle' profile, which means that initially its more invested in stocks and shares, then as you approach retirement age it switches over to safer assets.

Anyway, I looked into the growth I'd had over the 16 ish years Ive been in the scheme, and where it was invested. I was not happy with what I found.

There was a very high proportion of UK equities. I found out that many 'default' funds have this, because the logic was its a UK scheme, for UK employees, and that meant that those people favour UK bias. This immediately seemed crazy to me, as the US has experienced much higher growth. Why would you favour UK equities over faster growing US equities with the US being the biggest economy in the world?

So I started looking into what funds were available. Wow its complex to analyse. Most funds are multi asset so have a mix of all sorts of equities or bonds (or other assets like cash, property) across a mix of jurisdictions. So if you wanted to target a certain percentage of say US equities, or emerging markets, or Japan etc, then there was quite a bit of analysis needed to sort it all out. My scheme had 83 funds to choose from. Each fact sheet gave a performance history, information on what mix of equities or other investments the fund contained and from what jurisdictions, information on the management fees, what baseline the fund was measured against/tracking, and finally a risk score ranging from 1 (safest) to 7 (riskiest).

So I did a whacking great spreadsheet to analyse all this. I listed down every fund I could pick from, and ranked its 5-year performance. My funds were ranked 50th and 79th out of 83 over 5-years.

The funds I was in initially (the default funds from the provider) had given me a total of around 29% fund performance until early 2020 (before the markets crashed when Covid happened). This is 29% over probably 16 years, so an average of less than 2% per year, which I thought was pathetic. The mix of these default funds was 75% equities and 25% cash and bonds. Of the whole portfolio, 32% was UK equities, 12% US, 12% EU and 6% cash.

So I did a bunch of analysis. Initially I was trying to micro manage, by selecting different smaller percentages in a high number of funds. But I pulled back from this idea and settled on a simpler approach with just two funds, both multi-asset funds but one of them is an ex-UK fund, which meant it had no UK equities in it. I could adjust the proportions to get the higher proportion of US equities I wanted.

So I made the switch in October 2020. My new portfolio had 78% equities and 22% cash and bonds, but in contrast to the starting position, now I had 35% US, 19% UK, 14% EU, and only 3.5% cash. The funds I picked were ranked 17th and 29th out of my 83 ranked list.

Since 2020, my portfolio performance has been about 24%, in 3.5 years so nearly 7% a year growth. This is excluding the Covid rebound. But, obviously there were lingering effects of this so its difficult to disentangle it completely.


So why am I posting all this?

The analysis I did was very manual and long winded, because I needed to go into all my provider's factsheets and manually extract all the fund performance data. I need to repeat this exercise now to see if a) my choices were the right ones - have my new funds done better than the ones I moved from in the first place; and b) to see if I need to move to any alternative funds or adjust my mix of assets/jurisdictions.

I wonder if any other people here took a strong degree of control over the pension fund investments and if so, how do you manage it? There are limited tools available on my provider's website hence why I had to do a lot of manual work.

I also remain annoyed at the lack of performance in my scheme over the 16 years prior to my interventions. The missed growth from a poor choice of funds is, in my opinion, bordering on corporate incompetence.

 

[danlightbulb]

And this is why you should really keep an eye on these things.

For the first 10 or so years, our employee scheme was managed by a trust, there wasn't even an ability to switch funds around. Then in 2015 they switched to an externally managed provider and that's when I gained the ability to self manage the fund allocation.

But the information was abysmal, there was never any training on how to manage your funds or use the provider's website.

In my case I just kinda trusted that these 'experts' were managing it properly.

 

[danlightbulb]

At some point they'll change it so the employer has to pay into whatever pension you choose, but for now they don't do that. So I always have one random pension for the current employer, which gets consolidated after I leave them. Sometimes these pensions offer me a choice, so I'll choose a high proportion of global stocks.

Everything else is in a Vanguard SIPP. I like this because it keeps things consolidated/simple, and it seems safer than depending on random pension companies which go bust from time to time. I have one ETF for stocks, one ETF for bonds, bond allocation increases as I age. I don't regularly look at it, mainly just when I'm transferring a pension in.

Spreadsheet:

Spoiler

yellow = when I have full NI years
green = when I can start drawdown
blue = when I can get state pension

Interesting that you're ramping up the bonds on a linear profile over such a long time frame. The default 'lifestyle' funds I was originally in did this, but only over the 5-10 years pre target retirement age.

A question I have is what happens if a defined contribution scheme goes bust - is it protected like the £85k per institution government guarantee for savings? If so, up to what value?

 

[danlightbulb]

I don't suppose your spreadsheet of dreams would be useful as a template for others (aka me)? I love a good spready.

If you're referring to mine...then as a first go it was a bit messy. Second time around I will tidy it up and try to improve the functionality.

But essentially I first compiled a list of all the funds like this from the factsheets. This was laborious, and I was hoping data would be available somehow to download rather than having to manually open PDF factsheets:

Spoiler

Then I analysed the breakdown of the funds I had and the ones I was interested in like this. Couldn't do this for every fund, would have taken ages.

Spoiler

Once I'd figured out what split I was looking for, I manually tried different fund percentages of different funds until I arrived at the split I wanted.

Also checking out the fees at the same time. Some of the best performing funds had high fees too and I didn't know how to work out if that was worth it or not.

 

[danlightbulb]

Who is your provider? Do they not offer other managed funds? What's the total value?

Aegon. There are 80+ funds overall that I can pick from, but a lot of them look similar just different mixes of equities in them.

Im over six figures now so its important. I put in £10k a year now with my employer contribution plus my own, and I have about 25 years left.

 

[danlightbulb]

I'd look into increasing that contribution.
edit: to be tax efficient, and get a pot big enough for the lifestyle you expect.

I cant, I already put 12% and can't afford more than that yet. Ive been increasing my contribution every year with part of my pay rise.

 

[danlightbulb]

Do they not offer any over the top service? I chose a "path" and then it dynamically allocates and moves stuff around based on target retirement.

There is only the lifestyle fund which starts off as 70/30 equities/bonds then as you reach 10 years from retirement it starts moving more into bonds, then 5 years out it starts transferring to cash. The equities fund they use for this is the AGN BLK 50/50 Glob Eq Idx (BLK), which as I understand it is 50% UK equities and 50% global.

So as that mix isn't what I think is best, those lifestyle options are no good for me.

 

[danlightbulb]

Here is the factsheet for the AGN BLK 50/50 Glob Eq Idx (BLK).

Obviously the last 5 years has been extremely volatile, so that performance data is all over the place. But, the fund has tracked its benchmark, which is what it's supposed to do I guess.

 

[danlightbulb]

Do they not offer a global equity only tracker e.g Aegon Blackrock MSCI world index. Having 50% in the UK is costing you a lot.

Im not actually in that fund anymore, I came out of it 4 years ago to improve my overseas equities proportions. I was just using it as a comparison.

This is what makes assessing this stuff so difficult. Is there an approach you're supposed to use?


Take three factsheets - AGN BLK 50/50 Glob Eq Idx (BLK) above which is all equities, 50% of which is UK, and has returned 5.4% p.a over 5 years and 13.9% last year, with a risk score of 5/7.

The two funds Im in since my switch around in 2020 are 30% in AGN BLK World (ex UK) Eq Idx which is equities outside of UK, and this has returned 9.1% p.a over 5 years or 12.5% last year, with a risk score of 6/7. So this has done better than the fund above over 5 years but worse over the last year.

And the other fund Im in is 70% in the AGN BLK Consensus Index (BLK) which is a multi asset fund so includes equities (UK and overseas), bonds, gilts, cash. This has done 4.3% p.a over 5 years and 8.1% in the past year with a risk score of 4/7.

So overall my returns have been around 5.7% p.a over five years across both funds as an average.


So if I was 100% invested in the AGN BLK 50/50 Glob Eq Idx, I'd have made the most in the last year, but less over five years than the funds Im in. And if I'd have been 100% ex-UK equities, rather than the multi-asset fund, then I'd have had returns closer to 10% p.a instead of averaging about 5.4%.


So I feel I can still improve on this, I want more like 7-8% p.a

 

[danlightbulb]

Should remember that 6/7 is pretty high risk.

All the equity only funds are 6+ on the risk scale. Only way to get that down is to go for multi asset funds which include bonds, gilts and cash. Which is what I did, as I said in post 1 im 78% equities, 22% bonds/gilts/cash. But sacrifices returns doesn't it, 5.4% p.a instead of 10% p.a.

 

[danlightbulb]

and just because a fund drops in value / doesn't rise as much as you'd like, doesn't mean it's bad.

So how do you judge good then?

Ideally you should be picking funds based on the outcome you want to achieve

Outcome is obvious isn't it - maximum return for minimal risk. Obviously there will be an optimum level.

Im not interested in ethical funds or any particular developing regions, just want max returns for lowest acceptable risk.

 

[danlightbulb]

If you're youngish just a world index tracker and forget about it.

43. So 20-30 working years left.

In theory now is the time for my pension fund to experience the maximum growth it can. There is enough in there to give it some punch, and Im paying in the most I ever have, and I am young enough to still take some risk on it.

 

[danlightbulb]

ep. I would personally go risky early on, but then derisk as I got older, which is kinda the point in lifestyling

Oh absolutely. And the problem in my case is that when I started paying into the workplace pension I was 24 and not earning much, and we didn't get any say in the choice of funds. In hindsight, for someone my age it should have been 100% equities with a high US proportion. But they didn't do that, so in combination with my low contributions the early performance was poor.

We were only given the ability to manage our own funds in 2015, and I only looked at it in detail in 2020. So now Ive begun to correct the previous underperformance - Ive switched funds, paid in a lot more. So now I need to maximise the returns whilst I still have time.

 

[danlightbulb]

Personally, I'm still 100% equities

Mind if I ask your age?

 

[danlightbulb]

Hmm. Maybe I'll increase my equities from 78% then. I remember when I considered this last time, and I thought about doing 85% or 90%, but what stopped me was thinking well what's the point of having just 10% in bonds anyway? If the whole stock market crashes and I lose 90% of everything, having that last 10% left over is not going to make much difference.

I thought the idea of having a mix of equities and bonds/gilts was supposed to be when one doesn't do well the other one takes up the slack. But that doesn't appear to have happened.

 

[danlightbulb]

Here is a fund my scheme offers. Meant to be a pre-retirement fund - so one would assume that means its meant to be safe...look what happened to it!

 

[danlightbulb]

Just downloaded all 77 factsheets from my provider. Now to get examining.


Any thoughts on what are acceptable fees? My available funds seem to go from about 0.15% lowest, through 0.45-0.60% quite a few in that range, and then the highest there are a couple of over 1% fees. There doesn't seem to be a flag on my factsheets for whether a fund is passive or active.

 

[danlightbulb]

Waste of time downloading 77 fund factsheets.

Do a risk profiler online, then look at funds that suit your attitude to risk... That will rule out 50/60% of the funds you have access to.

Unless you have a large fund, don't over complicate it. Stick with 2/3/4 funds max.

Each of those funds are diversified enough then you'll have another level of diversification across various sectors/geographical areas

I get you, but examining all of the funds is the only way I can rank their performance. There are a lot of similar funds - for example several versions of 50/50 equity or 70/30 equity. I will need to see how they perform against each other and what the differences are between them, and all of that info is on the factsheets.

 

[danlightbulb]

I've managed mine pretty closely ever since I started contributing to a scheme at 21. I was fortunate enought to work for an accounting firm which had a wealth management business, and one of the advisers gave the other staff a presentation on the basics.

My general strategy has been

1. Minimize fees - Ultimately the stock market is made up of a bunch of fund managers investing in stocks and claiming they are investing better than the other managers. Unless you are capable of assessing the competence of one manager over another (and how on earth do you do that - don't say past performance!), you are taking a complete guess. Therefore the logical thing to do is find the one who is charging the least for what you want to invest in, which will usually just be a tracker fund. This accords with research that shows, on average, active fund managers do not outperform passive funds after taking into account fees. Also check fees if you have multiple pensions schemes and look at switching - I have two Aviva schemes with different employers and the fees on one are 2.5 times of the other!
   
   
2. Maximize exposure to risk when young - The UK's rules on pension funds are extremely conservative which is reflected in the funds available to invest in. Even if you select the most super duper risky fund the underlying investments will still be a vastly diversified range of securities in a range of mostly public companies, meaning that its hard to get it too wrong. Generally you should be fully exposed to equities for a significant chunk of your working life to maximize returns whilst you can ride the volitility.
   
   
3. Stick to your strategy - Short term poor performance will make you question whether you made the right investment decision, but the point of investing for your pension is that there will be ups and downs which are likely to mostly even out over your working life. If you decide to change strategy you are probably wasting your time because whatever issues you think have with your existing strategy are already priced in. Switching funds also means locking up cash for a few days whilst the provider arranges the transfer, meaning you could lose out on a few % of gains if you are unlucky, exposing yourself to uneccessary risk.

At the moment, my funds invested in are as follows:

34% emerging markets (0.26% fee)
18% world ex UK (0% fee)
16% US (0% fee)
15% UK (0% fee)
7% Europe (0.03% fee)
7% Pacific rim (0% fee)
3% Japan (0% fee)

There is also a 0.14% platform fee

Interesting thanks. Heavy on emerging markets I see. And no bonds at all.

 

[danlightbulb]

This is my current pension scheme, from 10 years to retirement they start to move it more into bonds. I'm going to ask them to keep it in the scheme for longer as I'm going to live a long life and I hopefully will have other means to to support myself in the first few years.

As said before, the fund as access to other investments that I don't have access to if I opted out and went pick a mix.
It's basis towards the UK market but there are some advantages of that, as you don't have to worry about foreign taxes and exchange rates.

I work for one of the largests banks in the world, deemed too big to fail (if we do; the world will be in ****).. I have thought about opting out and making my own pension fund all the time but the people who work and get paid to trade for a living, have all have recommended that I don't.

Yes, there are some right rubblish pension funds in the uk but anyone who set up their own pension will need to manage their pension way past retirement.[/URL]

I dont have access to any Alternative Credit funds and limited property funds as well. But isn't that rather low on equities at 35%? How old are you?