Skandia says a successful investment strategy would outstrip the Government’s claimed 25 per cent improvement on pension values from cutting fund charges.
The company’s analysis shows that an improvement in investment performance from the worst returns to average returns can increase pension values by over 50 per cent.
In the Pensions White Paper, the Government said that reducing funds’ annual management charge from 1.5 per cent to 0.5 per cent could boost the value of a pension fund by 25 per cent.
These calculations assume that an investor saves consistently from the age of 25 until the future state pension age of 68. Skandia’s research is based on a median earner with a salary of 23,000 making total contributions of 8 per cent.
An improvement in average annual fund performance from the worst to the average balanced managed fund over the past 15 years – from 4 per cent to 5.5 per cent – would increase the pension fund size after 43 years from 210,520 to 317,534, a rise of 51 per cent.
Head of marketing Billy Mackay considers that the results demonstrate that asset allocation is crucial for determining returns, therefore highlighting the risks of millions of people being herded into a default fund without advice.
Mackay says: “A simple analysis shows that while the Government’s claim is theoretically true, the effect of higher charges can be more than compensated for by even a moderate improvement in fund performance. Simply put, good advice should more than pay for itself.”
Pensions Policy Institute research director Chris Curry says: “A number of factors, including employer contributions and investment returns are more important than charges but there is no guarantee that advice will definitely improve returns.”