The pick of the pension plans

The fact that the past is no real guide to the future is the single most important fact of life in personal finance. It is not much consolation, however, in choosing a personal pension, where the difference in pay-out on an identical investment can easily be 50 per cent and you might not find out until it is too late to change your mind.

To help guide investors looking for unit-linked pension plans, actuaries Bacon & Woodrow (which does not recommend with-profits pension plans to clients) has subjected 180 funds with a full five-year record to a series of tests.

By awarding points for good performance in each three-month period, the 90 funds that had improved the value of the fund least were eliminated.

The survivors were tested again to select those that appeared in the top two quartiles most frequently and in the bottom quartile least often, which eliminated another 32 funds. A third screening eliminated 18 funds whose performance was most volatile.

The remaining 40 were ranked according to their performance in each quarter and over a 12-month moving average. Another four funds were eliminated for showing a declining performance trend.

At this stage, Norwich Union had four funds in the list, Friends Provident three, Clerical Medical, London & Manchester, Prudential and Standard Life two each. The 36 survivors, run by 27 different providers, were again tested to screen out funds containing less than pounds 20m, those not dealt through independent financial advisers, those not open to new members, those with no enhanced nil-commission option, and those that apply penalties to all transfers and early retirements.

This eliminated a further 18 funds. The remaining 18 were tested for the effect of their charging structures, based onassumptions drawn up by Bacon & Woodrow.

The results show significant differences, with charges on the dearest funds twice those of the cheapest. Disclosure has already shifted the emphasis away from initial commission charges to level commission charges. But nil-commission policies, where the intermediary charges a fee for advice rather than a commission, are the best. Over 20 years, the fund would be 11 per cent greater in a nil-commission policy, assuming investment performances were the same.

The results still varied considerably between providers and different types of pension plans and some undisclosed charges of up to 0.5 per cent a year may remain. For recurring single premium policies, however, Standard Life, Norwich Union and Sun Life came out cheapest. For transfer payments, Standard Life and Norwich Union outperformed the rest, Equitable Life dominated individual rebate-only plans, and Norwich Union, Standard Life, Equitable Life and Gartmore featured in the regular contributions category.

The implications of performance-testing, backed by information of charging structures required by the new disclosure rules, will increase the competition between pension providers. Charges are already falling, according to B&W partner Andrew Warwick-Thompson, but providers have had to reduce administration and distribution charges in order to do that.

That can only be done by investing in powerful and expensive computer systems, which will concentrate the personal pensions market in the hands of a small strong elite. Financial advisers will also lose business, and within 10 years there will be few small local firms of advisers.