Not only is the divergence on pension investment returns for the same asset class surprisingly large, our analysis has identified that underperformance is in many cases persistent and long lasting. This can have a very large impact on your retirement income.
Consider the following example; let’s assume you have a current fund of €500,000, are making €2,000 per month pension contributions (between employee and employer) and intend to retire in 15 years’ time. In total you will have invested €860,000 over the 15 years.
We have used data from Money mate to extract the last ten year pension investment performance, across the providers for their ‘Balanced Managed Fund’ which is widely used in Irish Group and Individual Pensions. The performance figures are net of annual management charges.
We compare how the example above would work for three different scenarios i.e. for the best performer– Company B , the ‘Market Average’ of the 11 funds reviewed and the worst performer i.e. Company A
As the graph shows there is a considerable difference using the example above. With Company A, your pension is €839,150 after 15 years, which is €20,850 less than your total investment, whereas with the ‘Market Average’ your pension grows to €1,327,581 (a gain of over €460,000). If you had invested with Company B, the best company, your total investment of €860,000 would have given you a total pension pot of €1,836,995. This additional €976,995 for a similar fund and risk level is a considerable difference to your retirement fund!
As there is very little mobility between pension fund managers in Dublin, there does not appear to be any realistic mechanism for ‘mean reversion’ so underperformance can and does persist.
Bottom line is you need to make sure your investment manager is not consistently in the bottom quartile. The effect on your retirement pot could be huge. If you find that your current provider is bottom quartile we suggest you take prompt remedial action.