The cost of topping up UK company pensions has been drastically reduced in the past year, but returns have also fallen fast, according to Watson Wyatt's survey of UK additional voluntary contribution schemes (AVCs).
According to the firm, the introduction of low cost stakeholder pensions this year has forced AVC providers to reduce charges, in some cases by as much as half. The survey of group AVCs reveals that both charges and resulting reduction-in-yield figures have fallen greatly over the past year, particularly for lower rates of contribution.
However, the performance of AVCs have been poor during a period of difficult investment conditions. Unit-linked AVCs have been worst affected. The median performance for a £100 per month contribution into a managed fund over a five-year period ending March 1, 2000 was 12% a year. The same contribution over five years was down to 7% a year.
Many people have focused on the reduced charges of AVCs, said Andy Parker, a senior consultant at Watson Wyatt. While lower charges are to be welcomed, it is important to recognise the more substantial effect of investment performance.”
The Watson Wyatt survey found that for a £100 contribution over five years to 1 March 2001 to a with profits AVC the best annual return was 13.6% (Co-operative Insurance) and the lowest was 2.9% (AXA Sun Life).
The last twelve months have seen rapid change in the provision of AVC facilities to company pension scheme members,” said Parker. Trustees should seek to ensure that they keep abreast of developments and continue to offer cost effective, comprehensive AVC arrangements for their members' long-term pension savings.
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