Governance, Administration and Investment, these make the driving pillars of a good pension service. With these in good hands, contributors can be assured of a considerably good level of retirement fund build-up. The spotlight however falls on pensions investment in this edition. This is one important activity that accumulates our funds for retirement. We should therefore be interested in how the ‘multiplying machine’ is functioning.
The 2nd and 3rd Tier schemes fall into a category of pension plans called Defined Contribution (DC) plans. For these schemes, the level of benefits is directly linked to investment performance. They are also the ones that would give us lump sums, so we should actually be interested on how investments of our schemes are doing.
Our contributions find their way into a number of investment instruments each with their potential to grow the fund as well as their own level risk. Usually the investments with the higher returns tend to be ones with higher risk. The risk lie in a unexpected movement in investment returns leading to a return lower than expected, partial loss or total loss of investment. The ability of your fund manager to identify good investments has a direct impact on the safety, performance and the growth of your fund. Thankfully, the regulator has a guideline for investing pension funds which fund managers adhere to. The intention is to place some limitation on the fund managers to undertake potentially risky investments that can erode value from the pension fund. The current limits look a bit tight but it has served a good cause over those couple of years the stock market wasn’t doing well.
The stock market did not do well in 2014, 2015 and a larger part of 2016 and this could have affected schemes badly should the equity part not been limited to only 10%. For those (including me) who would normally had invested 15-20% of the fund in equities for long term value, we would have lost some money. By then the Treasury bill, fixed deposit from banks, government bonds and corporate bonds did well for pension funds and helped funds return between 20% – 24% for end of 2016 and 2017, depending on how good the fund manager is. The guideline has however reviewed the equity limit to 20% and the schemes are raking in good returns (at least for now).
This is just to give an idea of how our 2nd and 3rd tier contributions are deployed and how they are doing. You as the contributor may not need to have a detailed knowledge of investments to appreciate how your pension contributions work. You should however be able to know whether your contributions are doing well or not. Your portion of fund should grow from two sources. The regular contributions and the return on investments of fund. These two information should be on your scheme statements. You should be able to see how much you contributed within the period and how much gains (or losses) you made.
Some of us are of the view that the charges to the scheme should be included on contributors’ statement so they know how much management of their funds is costing them. It is time for issuing of statements. The law requires trustees to provide statement to contributors at least once a year. Pension statements for 2017 should be made available by 31 March 2018. Some corporate trustees or administrators actually have online portals which permit contributors to view their statements all time. Just check them and ask your trustee the right questions. The same applies if you have investments outside of the pensions framework which you intend to use to augment retirement income. It is worth mentioning the fact that you lose out on tax concessions, regulated charges and probably some protection from the regulator’s investment guidelines if you invest outside of the pension framework. If you have the intention of investing for the long term such as retirement, it is worth making use of your full tax allowance before looking elsewhere. It is also a great idea to further invest within the pensions framework even if you have utilized all the allowable tax exemptions within the pension framework as there other benefits to protect your fund. Pension contributions are like seeds sent ahead to provide food ahead of time in future. It is worth knowing the grounds they are sowed and how they are growing. The error mostly committed by those of us in this part of the world is that we are totally oblivious of how our retirement finances hold. This is so even for financial minds. In this new era of multi-tiered pensions we need to be aware of what is going on and how our schemes are doing. Waiting till you get to the time you need your benefit is quite a risk to take. Take charge now!
The author is a Pensions and Management Consultant with M-DoZ Consulting. He provides retirement planning and pension advisory services.