Understanding Pension Statements

A friend recently asked me to look at a statement of her personal pension plan from a well known large provider of pensions and life insurance.

The current value seemed to be fairly straightforward (this was a managed pension fund (investment linked)), so the value should simply be the number of units times the price, although, for reasons not obvious from the statement, the current value was split between two retirement dates. I can only assume this may have something to do with the interaction of changes to the state retirement age and the previous regime of contracting out, but without checking with the provider, I couldn’t be sure.

However, this was a minor detail. The first real problem arose because, on turning to page 2, it turns out the current value isn’t the current value; or rather, to quote from the statement, ‘the total fund value is different from the current value’. Eh? It turns out the current value is actually less than the current value, so to speak, because, again to quote from the statement, ‘the current value allows for the future initial unit charges that would have been deducted if you had chosen to move to another plan’ at the statement date. Future initial unit charges because she wants to move seem a bit unfair, but it is true this was not a whole heap of money, amounting to 1%, but still it is nice money if you can get it.

Where I really struggled was in turning to page 3, which at the top had a table entitled ‘Here’s what your plan could give you back when you retire’ with the value at retirement date and an annual pension. Helpfully (or so I thought), these had been reduced by 2.5% inflation to give a better idea of real value. The statement commented on the various assumptions behind these calculations and, in expanding these, then had another table with ‘Assumed Growth Rate each year: 4%’. Below the table were the words, ‘In line with the Financial Reporting Council requirements, the growth rates shown in the table above are after we have reduced them by 2.5% to allow for inflation.’

Momentarily in doubt as to which table was being referenced by this last statement, I concluded this must mean an investment return of 6.5% had been assumed less inflation of 2.5% to give a real return of 4%. However, when I tried to do the maths this didn’t work out to give the inflation adjusted numbers in the first table. Ah, of course, charges!

PENSION_2423831bTo be fair, the statement does then go onto talk about charges – it just doesn’tsay how much they are. From the tables I worked out that the insurer must be taking out approx. 0.875% per annum (which, in justice, is probably not too bad compared to some other providers), although it doesn’t sound so good when expressed as 22% of the assumed real return. I did try and check the charges per the website and was almost defeated by the number of options in terms of product, fund etc. before I did find the right fund: charges are stated to be 1.02%, so my friend must be getting a discount.

Why these companies can’t show a simple statement showing; (a) gross investment return, less (b) charges, less (c) inflation – and say ‘this is our best guess of the real value you are going to get back.’, I have no idea.

My final thought relates to the assumed gross investment return of 6.5%; is this realistic? The fund in question had 77% in a mixture of UK and overseas equities and 23% in bonds and cash, probably not untypical for a managed fund like this. At a rough guess both asset classes are yielding on average 2.5% ish; assuming no capital gain from the fixed interest side, this means the equities have to deliver 7.1% or so in capital gain each year. Not impossible, but a tad optimistic from where I am sitting.