John and Sarah recently sought advice regarding their pension fund. John had previously transferred his pension from a final salary scheme, with a transfer value of £850,000. The advisers who facilitated the transfer had set up an investment portfolio for him. However, John was largely indifferent about the portfolio’s management or the associated costs. His perspective was straightforward: as long as the fund earned 2% annually, he believed he would be better off than if he had remained in the original scheme. John had calculated that achieving this modest return each year would still surpass the benefits provided by his previous pension plan. To him, the decision to transfer was obvious and required little further thought. Our conversation focused on their long-term responsibility for managing this pension fund.
John was confident that achieving a 2% return annually was a simple task—something any investment manager should be able to deliver. Consequently, he didn’t concern himself with what the managers earned, so long as he achieved his 2% target. This belief in the 2% return was a key factor in convincing both John and Sarah that transferring out was the right decision. It seemed entirely logical to them that if they could control their own fund and only needed to make 2% each year, the transfer was the best option.
However, I pointed out that they were missing the critical point. The real challenge John and Sarah face is how they will manage this pension fund for the rest of their lives.
Using the 2% target as a justification for transferring out is one thing, but relying on it as a benchmark for future returns is flawed thinking. The 2% figure should not be the basis for evaluating long-term investment success—it’s a dangerous oversimplification. The decision to transfer out and the strategy for managing the fund are separate issues and should be treated as such. A major focus for John now should be letting go of his fixation on the 2% target.
Can John be confident that this 2% return will truly meet his needs? Has he rigorously tested this assumption? More importantly, has he considered why a transfer that seemed so advantageous to him would be offered by the pension scheme? If it appeared to be such a “no-brainer” decision, why would the scheme allow it, potentially putting remaining members at risk? If John were a trustee of the pension scheme, why would he agree to pay out such a high transfer value if it could negatively impact the other members? This raises the question: is John’s assessment of the 2% return truly accurate?
So, what should John and Sarah do next?
It’s crucial that John and Sarah reassess their approach. They now have £850,000 to manage for their future, and it’s essential they make informed decisions. To begin with, they need to implement independent benchmarking—either by themselves or by delegation. Have they obtained a framework to measure ongoing risk-adjusted returns that is independent of their advisers and fund managers? While they mentioned that their current advisers handle this, I emphasized the importance of doing it independently. But why is this necessary?
Imagine a scenario where a university lecturer is allowed to set their own exams and grade them. If the lecturer’s job and income depended on the success of their students, wouldn’t it be possible for them to manipulate the results? Certainly. That’s why the education system ensures assessments are independent.
Similarly, if John and Sarah delegate investment management to advisers without setting up independent performance measurement, there’s a risk that results could be obscured, especially if the advisers’ income is tied to the fund’s performance. Without independent benchmarking, investors may inadvertently take on unnecessary risks with their future.
For John and Sarah, the first step is to establish proper, independent benchmarks to assess the performance of their advisers and managers. This analysis can be self-directed or delegated, but it is essential. Without such measures, long-term outcomes can suffer significantly, given the high stakes involved.
If you’ve transferred your pension within the last five years and haven’t yet implemented independent benchmarking, we can assist. Whether you choose to handle it yourself or prefer us to manage it for you, don’t hesitate to request a consultation today.