Consumers who save via pension funds are putting their retirement incomes at risk due to a combination of high fees, opaque commissions and taxes, an investor group has claimed.
Brussels-based Better Finance analysed actual returns on pensions in different European countries since 2000 and said people who pay into pension funds end up worse off than if they had invested the money themselves.
“Most pension savings did not, on average, return anything close to those of capital markets, and in many cases even wiped out the real value for European pension savers,” said a spokesperson for the group.
However, Tim Gosling, policy lead for defined contribution pensions at the UK Pensions and Lifetime Savings Association, said pension schemes were the best vehicle for long-term UK savers, due to the variety of benefits and incentives they offer.
“In the UK, pension income is not taxed until retirement, investment returns are exempt from capital gains tax and pension assets are exempted from the universal credit means test – retirement saving through a workplace pension scheme should remain the default choice for most people, most of the time,” he said.
Savers in many other European countries do not benefit in these ways, however. In a stark illustration of alleged pension fund underperformance, a Better Finance report found that if a consumer directly invested in European capital markets in 2000 with a portfolio consisting of 50% equities and 50% bonds, they would have received a 105% gross return by January 1 this year, or 47% in real terms.
On an average annual basis, this would mean a return of 2.5% – but the report found that savers in most European countries received considerably less. Pension funds in France, Italy and Spain have even lost an average of 0.8% every year, the group claims.
On top of fees, commissions and taxes, Better Finance said savers lack access to clear information on how much investment costs them, and how much value their pension offers versus alternatives, such as passive investments.
“Over the long term, pensions do produce nominal returns, but you would expect that anyway – equity markets have historically been remarkably generous to patient investors,” commented Robin Powell, director of Evidence Based Investor.
“The truth is that very few of us achieve anything like market returns, and millions of Europeans are facing retirement in poverty as a result.”
The report can be foound here.
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