John and Sarah came to discuss their pension fund. John had previously transferred from a final salary scheme; the value was £850,000.  The advisers who transferred the scheme had set up a portfolio. Yet, John didn’t really care about how it was managed or the costs. His view was, I don’t care how much it costs to manage the fund because all I need is 2%.   He had calculated to equal the benefits of his old final salary scheme, if he just made 2% each year, he would still be ahead of any benefits his scheme offered. As far as John felt, it was a no-brainer decision.  We talked about their responsibilities of managing the pension fund for their future.

As far as John was concerned, making 2% each year should be simple. Anybody should be able to do that. As such, it doesn’t matter to John what the investment managers make on his pension fund, just as long as he makes 2%. The 2% provided enough evidence to persuade John and Sarah that the transfer was the right thing to do. Clearly, if you control your own fund and you only need to make 2% each year, it seems perfectly logical why they should transfer out.

I said to John and Sarah they are missing the point.  John and Sarah’s biggest issue is how they manage their pension fund for the rest of their lives.

The 2% anchor has been used as the metric that helps justify a transfer out; it should not be the metric used to assess future returns. That is investment madness. The 2% anchor should be eradicated from your mind.  In essence, the decision to transfer and how to manage your pension fund are completely separate issues and should be treated accordingly. The key issues for John was to help him forget his 2% target.

Can he be sure that 2% actually works? How sure is he it will replicate his previous benefits? Have they tested it fully?  Did they ever consider if it looks like a no-brainer decision to transfer out, why would the pension scheme put remaining members at risk by paying out a transfer that seemed too good to be true?  I asked John to imagine if he was a trustee of his employer’s pension scheme, why would he offer transfer values so high as it could impact on the remaining members?  In other words, perhaps his assessment of 2% may not be a true and accurate assessment of the return needed.

What action could John and Sarah now take?

John and Sarah, therefore, needed to start thinking again. They needed to recognize they had £850,000 to invest for their future. How were they going to make sure they were going to make the right decisions?  To start with they need to introduce independent benchmarking which they could do themselves or delegate.  Have they obtained independently of their advisers and fund managers a framework for checking ongoing risk-adjusted returns? They said their existing advisers were doing that. My point was independent of their existing advisers…What’s the point you may ask?

Imagine you are back at University. If the lecturer is allowed to set their own exams and mark them, is it possible, especially if they are judged on the success of their students, that the lecturer may “massage” the results?  Absolutely it is possible especially if the lecturer’s income and job was based on student success.  Thankfully, we have an educational system that ensures tests are independent.

In the same way, if you delegate to investment managers or advisers and ask them to monitor performance, is it possible they may “cloud” the results if they are not as everyone expected? Absolutely. It’s possible, especially if their ongoing income depends on it.  If any investor delegates investment management to others and have not set up clear measurement parameters independent of their managers, they are taking unnecessary risks with their future.

John and Sarah’s first step was to ensure they had introduced proper independent benchmarking to measure the success or failure of their advisers and managers.  This is something that can be self-directed or it can be delegated. Either way, without such analysis long-term outcomes, can easily suffer as the stakes are very high.

If you have transferred your pension in the last 5 years or so, and have not introduced independent benchmarking, we can help you do it yourself or do it for you. Request your meeting today.