Is My Pension Performing Well?

Start by separating pension value from investment performance

This is probably the most important distinction in this guide.

Imagine your pension was worth:

£100,000

at the beginning of the year.

Twelve months later it's worth:

£112,000.

Excellent.

Has your pension investment returned 12%?

Not necessarily.

Suppose during that year:

you contributed £5,000

and:

your employer contributed another £5,000.

The pension increased by £12,000 overall, but £10,000 of that increase came from new money.

That is very different from the investments themselves generating £12,000.

Steve's observation

Your pension getting bigger and your pension performing well are not necessarily the same thing.

If we're going to judge the investment, we first need to separate:

money going in

from:

what happened to the money already there.

That's why PP-003 — How Do I Understand My Pension Statement? — comes before this guide.

So what does "good performance" actually mean?

This is where the question becomes more interesting.

Suppose your pension investment returned:

7%

last year.

Was that good?

I haven't given you enough information.

What was it invested in?

What level of risk was it taking?

What did comparable investments do?

What was inflation?

What charges were involved?

What period are we measuring?

What is the investment trying to achieve?

Without that information:

7% is just a number.

Compare like with like

Imagine two pension funds.

Fund A

Invests predominantly in company shares around the world.

Fund B

Invests much more cautiously across bonds, cash and some shares.

Fund A returns:

10%

Fund B returns:

5%.

Does that make Fund A better?

No.

It tells us Fund A produced the higher return during that period.

That's all.

It may also have taken substantially more investment risk to achieve it.

In another year, Fund A might fall considerably more than Fund B.

So performance needs context.

What is my pension actually invested in?

Before judging performance, find out what's underneath the pension.

A defined contribution pension might contain:

• company shares;
• government bonds;
• corporate bonds;
• property-related investments;
• cash;
• or funds combining several different asset types.

MoneyHelper confirms that pension investment options can contain very different assets with different risk and growth characteristics.

If you don't know what your pension contains, start with:

Where Is My Workplace Pension Invested?

for workplace pensions.

Foundation 3 then expands this in:

What Is My Pension Invested In?

Because judging performance without knowing what you're invested in is a bit like complaining that your Land Rover didn't beat a Ferrari around Silverstone.

That may not have been the job you bought it to do.

How much risk is the pension taking?

Investment return and investment risk are connected.

Generally, investments offering greater potential for long-term growth also involve greater uncertainty and greater potential for falls along the way.

Shares, for example, can experience substantial short-term movements.

Cash is normally much more stable in nominal terms but may have lower long-term growth potential and can lose purchasing power after inflation.

Bonds have their own risks and can also fall in value.

So if your pension produced a lower return than somebody else's pension, the immediate question shouldn't be:

"How do I get what they're getting?"

It should be:

"What risk did they take to get it?"

We'll deal with this properly in:

How Much Risk Am I Taking With My Pension?

Don't judge a long-term pension from one year

Pensions can potentially remain invested for decades.

Yet people understandably look at:

the last six months

or:

the last year

and decide whether something is working.

That can be misleading.

Investment markets move.

There will be good periods.

There will be poor periods.

Different types of investments perform differently at different times.

A diversified pension might even deliberately hold something that's currently performing badly because its purpose is to behave differently from another part of the portfolio.

So when reviewing pension performance, consider multiple periods where the information is available.

For example:

• 1 year
• 3 years
• 5 years
• and longer where relevant.

But remember:

past performance does not tell us what the investment will do in future.

MoneyHelper specifically warns that historic fund performance isn't an indicator of future fund performance.

What should I compare my pension against?

This is where benchmarks can help.

An investment fund may have:

• a market index;
• a peer group;
• a composite benchmark;
• an investment objective;
• or another stated measure against which its performance can be considered.

The fund factsheet should normally explain its objective and relevant benchmark information.

But again, use the right comparison.

A cautious multi-asset pension fund shouldn't automatically be judged against a global equity index.

They're doing different jobs.

Likewise, simply comparing your pension with:

the S&P 500

because you saw on the news that American shares had a brilliant year can tell you very little about whether your pension strategy is appropriate.

Steve's observation

There's always an investment somewhere that's done better than yours.

Always.

If your pension grew 8%, somebody on the internet will happily tell you theirs made 14%.

If theirs made 14%, somebody else bought something that made 30%.

And somebody else bought Bitcoin in 2011.

That's not a retirement-planning methodology.

What about inflation?

Performance isn't only about whether the number has increased.

Over long periods, inflation reduces what money can buy.

If your pension grows but the cost of living also rises, some of that apparent growth has simply been needed to maintain purchasing power.

That doesn't mean your pension needs to beat inflation every single year.

Investments don't behave that neatly.

But over a long retirement-planning horizon, inflation matters because the eventual purpose of the pension isn't to produce a large number on a statement.

It's to help pay for:

• food
• energy
• holidays
• cars
• housing
• family
• and: life.

Those things change in price.

What difference do charges make?

Investment performance is only part of your outcome.

Charges matter too.

Most defined contribution pensions charge for investing and administering your money, and these costs reduce the amount remaining in the pension. MoneyHelper notes that even relatively small differences in fees can make a meaningful difference over time.

Suppose two investments produced the same gross investment return but one cost materially more.

All else being equal, the more expensive arrangement would leave less of that return in your pension.

But:

do not jump from that to "cheapest is best."

A pension might provide different:

• investment choices;
• guarantees;
• protections;
• administration;
• service;
• retirement options;
• or other features.

And MoneyHelper specifically warns that transferring purely to reduce charges could result in valuable pension benefits being lost.

We'll deal with this in:

How Much Am I Paying in Pension Charges?

What if I'm in a default pension fund?

A lot of people are.

A default fund is generally designed to provide an investment approach for members who haven't selected their own investments.

Some default strategies also change their investment mix as the member approaches the retirement date held by the pension provider.

MoneyHelper explains that many such strategies reduce investment risk as the expected retirement date approaches.

That creates an important performance question.

Suppose you're 62.

Your pension's selected retirement age is 65.

But you've decided you're actually working until 70.

The pension might be changing its investment strategy based on a retirement date that no longer matches your plans.

Or the reverse could happen.

You might intend to retire earlier than the provider thinks.

So when judging pension performance, don't only ask:

"How much did the fund make?"

Ask:

"Is this investment strategy still working towards the retirement I'm actually planning?"

What if my pension has gone down?

Don't panic purely because the number has fallen.

Defined contribution pensions are investments and their values can rise and fall.

A fall doesn't automatically mean:

the pension is broken

or:

the fund manager has done something wrong.

But neither should you automatically ignore it.

Investigate:

• Why did it fall?
• What is it invested in?
• Did comparable investments fall too?
• Has anything changed?
• How close am I to needing the money?
• Does the risk still match my circumstances and objectives?

If this is specifically a workplace pension, read:

Why Has My Workplace Pension Gone Down?

And if you're already taking retirement income, the issue becomes different again because withdrawals during falling markets can affect sustainability.

That's covered in:

What Happens to My Retirement Income if Investments Fall?

Should I switch funds if another fund has performed better?

Not simply because it has performed better recently.

That is one of the easiest investment traps to fall into.

You see:

Fund A +5%

Fund B +15%

and think:

"Why am I not in Fund B?"

So you switch.

But Fund B's 15% is historical.

You don't get to go backwards and receive it.

You now own Fund B after it has produced that return.

What happens next is unknown.

Changing investments should therefore be based on whether your current strategy remains appropriate for your objectives, timeframe and attitude to risk — not simply which fund happened to sit at the top of last year's performance table.

Is there an "average pension return" I should be getting?

This is one of the most searched and most dangerous versions of the question.

There isn't one meaningful return that every pension should achieve.

Pensions contain different investments.

People take different levels of risk.

They have different timescales.

They pay different charges.

They have different objectives.

Someone aged 30 investing for several decades may reasonably have a very different pension strategy from somebody aged 64 planning to access their pension next year.

So rather than asking:

"What's the average pension return?"

ask:

"Is my pension performing reasonably for the investments and risk I've chosen, and is that strategy still appropriate for what I'm trying to achieve?"

Much less exciting.

Considerably more useful.

The Pension Performance Check

If you're worried about performance, collect these eight pieces of information:

1. Current pension value
2. Contributions during the period
3. Investment fund or funds
4. Investment objective
5. Risk level
6. Performance over several relevant periods
7. Charges
8. Your actual retirement timeframe

Then ask:

Is the investment doing the job I need it to do?

What Should I Do Next?

Find out exactly where your pension is invested.

Don't settle for:

"It's with Aviva."

or:

"It's with Legal & General."

That's the provider.

We need the investment.

Find the actual:

• fund name
• investment strategy
• or: fund allocation.

Then we can start understanding why the pension behaves the way it does.

That's exactly what we'll do next in:

What Is My Pension Invested In?

Your pension doesn't need to win an investment competition.

It needs to do its job.

And that job is eventually to help fund your retirement.

That means performance matters. Of course it does. Over decades, the difference between good and poor outcomes can be enormous.

But chasing whichever investment did best last year isn't the same thing as managing a pension properly.

Steve's observation

The best-performing pension isn't necessarily the best pension for you.

The better question is:

"Is my pension doing the job I need it to do?"

And now we've got something useful to work with.

Looked at your pension and wondered whether it's actually doing any good? Don't judge it from one year's percentage. Understand what you're invested in, how much risk you're taking, what you're paying and what the investment is supposed to achieve. If you'd like help reviewing your pensions and understanding how they fit into your retirement plans, speak to Open Door Wealth.