The assured fund trap: why your pension might be going nowhere
I read my pension statement one year and found that a large chunk of my contributions had been sitting, undisturbed, in a fund that returned exactly what I put in. Not investment. Storage.
In part one of this series, I wrote about the single habit that led to me retiring at 50: I read my pension statements. Every year, when they arrived, I actually read them.
This is the story of what I found when I did.
The thing nobody tells you about default funds
If you've never actively chosen where your workplace pension contributions are invested, and most people haven't, they almost certainly sit in whatever your scheme designates as its "default fund." That default isn't necessarily wrong. But it's worth finding out what it actually is, because the range is wider than you might expect.
When I checked mine, I found that a significant portion of my contributions had been sitting, without my ever having actively chosen it, in something called an assured fund, sometimes known as a with-profits fund or a capital guarantee fund, depending on the scheme. The name sounds reassuring. The principle is straightforward: your money is protected. You won't lose what you put in.
The problem is the other side of that guarantee.
"For every pound invested, I'd get roughly one pound back. That isn't investment. That's just keeping pace with inflation, and on a bad year, not even that."
DavidThink about what that means over a working life. Your pension contributions go in each month. They sit there. They don't really grow. Meanwhile, inflation quietly erodes their purchasing power. The capital guarantee protects the number, but the number buys less every year than it did the year before.
When you're thirty-five years from retirement, parking your pension in a capital-guaranteed fund is a bit like training for a marathon by sitting on the sofa. You're protected from the risk of exertion, but you're not going anywhere either. Time is the most powerful tool a pension investor has. It's what allows investment growth to compound over decades. An assured fund wastes that advantage almost entirely.
To be fair to assured funds: They're not fraudulent or unusual. They serve a genuine purpose for people very close to retirement who cannot afford to see their pot fall in value at the wrong moment. But for anyone more than five to ten years from drawing their pension, they are likely to significantly underperform a diversified growth fund over the same period. The question is whether you're in one by choice or by default.
What I did about it
Once I understood what the assured fund was doing, or rather, wasn't doing, I switched. Around 1996, roughly halfway through my working life, I moved my contributions across three funds: a property fund, an emerging markets fund, and a managed fund that spread risk across a range of assets.
None of these were exotic or especially high-risk choices. They were simply funds designed to do what a pension fund should do over a long time horizon: grow.
I can't give you exact figures. This was thirty years ago and I'm working from memory. But I can tell you the difference to my final pot was significant. Significant enough that I'm glad I picked up that statement and actually read it.
Think about what those seventeen remaining years meant in practice. Seventeen years of contributions going into funds designed to grow, rather than funds designed to stand still. Seventeen years of compound returns, modest in any single year, but stacking quietly on top of each other, year after year. The mathematics of compounding is genuinely one of the more remarkable things in personal finance, and an assured fund, over that kind of timeframe, gives most of it back.
What I'm not saying
I want to be clear about something. I'm not saying you should do what I did, switch to the same funds I chose, or make any investment decision without understanding it properly first. Fund performance varies. Risk tolerance is personal. What was appropriate for me in my mid-thirties may not be appropriate for you right now.
What I am saying is this: find out what fund your pension is actually in. Read what it's designed to do. If the answer is essentially "preserve your capital," ask yourself honestly whether that's what you want your pension doing at your current age, and how many years you have left for growth to work in your favour.
Most pension providers have helplines staffed by genuinely helpful people. Partly because, as I've said, most of their members never call. Pick up the phone. Ask the question. It took me about twenty minutes and it was, in retrospect, one of the more useful phone calls I've made.
In part three, I've put together a practical checklist of the eight questions worth asking about your workplace pension, including this one, and several others that are easy to overlook.
