A £2,000 per annum contribution into a pension plan over the past 10, 15 or 20 years will yield a very different maturity value, depending on which type of pension plan and company provider is chosen.
As the series of tables show, the best 10-year pension fund result at £42,662 (13.43 per cent) is the unit-linked fund from Standard Life, the first time in the seven-year history of the Family Money Pension Survey that a unit-linked fund has beaten a with-profit fund to first place.
This excellent result has much to do with Standard Life's superb fund management - helped along of course by the 1997 stock market bull run, but it also indicates just how much closer unit-linked performances are to with-profit ones than in previous years. The next best result in the 10-year category comes from Friends First, formerly known as Friends Provident with a £40,282 cash return (12.43 per cent net yield.) Friends First only just squeezes out the next two best values - from GRE Life and Scottish Provident, whose with-profit returns of £40,159 and £40,037 respectively translate into annual net yields of 12.37 and 12.32 per cent.
At the bottom of the participating companies is the 10-year result from Irish Life's unit-linked fund with a cash value of £38,182 (11.49 per cent), £4,500 less than Standard Life. It should be noted, however, that Irish Progressive held the bottom position for the past two years but declined to participate this year.
Overall, the unit-linked figures are very satisfactory this year with increases of nearly £2,000 on last year's top 10-year performance of £40,813 from GRE Life. This both reflects the strong bull market of 1997 and that unit values more accurately reflect the underlying value of investment assets than with-profit funds whose final values are heavily boosted by final bonuses.
The 15-year category - into which a total of £30,000 has been contributed by the pensioner - also shows that the top return of £102,664 (14.30 per cent) is from a unit-linked fund, this time managed by New Ireland. The next best performer is the Friends First with-profit fund with a cash return of £102,507 (14.28 per cent). There may only be a fraction of a percentage difference between the two funds, but one distinguishing feature is the annual values of each fund at year 14. Just one year from maturity and the unit-linked New Ireland fund is worth £75,047 while the Friends First fund is worth £65,920 - £9,000 less. If the pensioner were to die in year 14, the New Ireland fund would pay his heirs the £75,047; Friends First would only return the premiums paid in - £28,000.
At the bottom of the 15-year returns is the unit-linked fund from Irish Life with a cash return of £79,639 (11.47), £23,000 less than paid out by the New Ireland fund.
The pension results also show that the effect of time on the growth of money is phenomenal when the annual £2,000 contribution is left to grow for 20 years.
No unit-linked funds have been operating for 20 years, so the best performer in this time category is the with-profit fund from Friends First, which is also top of the 10- and 15-year with-profit tables. At £265,576 (15.94 per cent) this fund exceeds the next three, GRE Life, Standard Life and Scottish Provident, by nearly £30,000. Norwich Union, which was the first with-profit company to reduce its unsustainable bonus rates a few years ago is left in fifth place with a return of £191,576 (£74,000 less than the Friends First result) and an annual net yield of 13.37 per cent.
It should be noted that the terminal bonus accounts for a huge - and disproportionate - part of the Friends First 20-year return. At year 19, the notional value of the fund is just £139,387 - a whopping £126,189 less than is paid out a year later, at maturity. The author of the 1998 Pension Survey, FDM's director, Mr Eddie Hobbs, says "that the company demutualised some years ago and these results are based on a conventional with-profit policy no longer available. Currently Friends First offer a unitised with-profit policy".
Bonus cuts are continuing, says Mr Hobbs, and this shake-out of the with-profit sector is likely to result in yields settling at between 911 per cent in the future. As for the jump in returns on unit-linked policies, "next year's yield levels are likely to be somewhat lower as a consequence of the fall in stock markets in mid-1998 and underscores the risk of remaining in funds without underlying guarantees in the final few years before retirement age. "The performance of Standard Life in the unit-linked sector," he says, "is particularly noteworthy since it maintained the number one position over the past four years. It should be remembered that this position has not been in any way artificially distorted by the underlying mechanisms of the with-profit sector. The result is testimony to good, solid investment management. Consistency has long been a feature of Standard Life investment and cannot be ignored."
(Copies of the 1998 Pension Survey are available from FDM at Summerhill House, The Curragh, Co Kildare, Tel: (045) 442051. Email: fdmfcs.iol.ie The cost is £30 for a printed copy and £25 for an e-mail copy.)
