Pick a pension management style that best suits your needs

By the end of January many self-employed people may begin or continue contributing to pension plans to avail of the tax relief available against their 1998/1999 tax bill. In addition to the self-employed, those in non-pensionable PAYE employment may claim a rebate on tax taken from their salary under the PAYE system during that tax year.

Those still hesitating about setting up a pension plan should do their research and take the plunge. A pension is usually the most important financial decision a person makes in their lifetime and the question of where and how funds are invested is an essential consideration.

In recent years, the virtues of "active" or "passive" fund management have been heatedly discussed in industry circles. Actively managed, unit-linked pensions came into the Republic around the 1970s, says Mr John McGovern of Beckett's employee benefits and pensions consultants. The move away from withprofit funds was due to a desire for more transparency, he says.

Today, individual and group pensions may choose to place their contributions in either a managed or consensus fund. A managed fund is "actively" managed meaning short and longterm investment decisions are made regularly by an individual, or team, of fund managers.

Inconsistencies in many companies fund managers' performance figures led Irish Life to identify a niche and in 1996 it launched a consensus fund, says Mr McGovern. The company copied a concept used in the US and the UK for several decades. At the moment, approximately 25 per cent of UK pension funds and 35 per cent of US funds take the consensus approach, he says.

With consensus funds, the changes reflect the consensus of decisions taken by all the managers in the market. In practice, this means that if the average percentage of funds invested, or a weighting, in equities by all Irish fund managers is 20 per cent and bonds are 30 per cent then the consensus fund mirrors that investment, says Irish Life's Mr Ray Gordon.

This method removes investment fund manager risk, or the worry that a chosen manager will under-perform their peers. This type of fund will always deliver a return reflecting the average performance results of all Irish fund managers. Individuals or group pension managers who want the peace of mind provided by an average result may choose a consensus fund because even the best performing fund managers go through periods when they underperform the market.

On the other side of the argument, active fund management can return excellent results over time in the hands of capable managers. The funds are constantly being adjusted by sector, weighting and asset class according to the fund's risk profile to deliver the optimum return. Active fund managers react to events in the market quickly rather than waiting to follow someone else's decisions.

Beckett's Mr McGovern says charges vary depending on the type of fund and fund provider. Group pension funds may pay less in charges while personal pension plans are usually more expensive. Consensus funds also tend to be less expensive than actively managed funds.

"Consensus funds' fees are lower because they're only adjusting on a quarter to quarter basis so transactions costs are only one-sixth of an active fund's costs," says Mr McGovern. Charges aside: "The bottom line for pension holders is what return they are getting from the fund."

With so many choices, it is difficult for the average consumer to make a distinction between fund managers. This is why the advice of an independent pensions adviser is so important. Of course, such advice will cost you but it is better to pay now than pay for your mistake upon retirement. Before visiting an adviser, look at the personal pension league tables which are published by pension consultants or the annual Irish Times Personal Pension Survey which appears every autumn.

Those surveyed in this newspaper's 1999 Personal Pensions Survey prepared by independent financial adviser Financial Development and Marketing (FDM) include with-profits providers: Norwich Union, GRE Life, Friends First, Scottish Provident and Standard Life. With-profit funds contain in-built capital guarantees and smooth out returns to avoid volatility and pay bonuses on maturity. GRE Life topped the with-profit category over the 15 and 20-year periods in the 1999 survey.

Unit-linked pension fund companies surveyed were: New Ireland, Hibernian, Lifetime, Irish Life and Standard Life. New Ireland was the top performing unit linked fund posting the strongest results in the 10, 15 and 20-year categories. The company was recently acquired by Bank of Ireland.

Companies that offer personal pensions but were not included in the survey for various reasons include: Canada Life, Eagle Star, Equitable Life, Ark Life and Acorn Life (formerly NZI Life).

Surveys such as these offer consumers information on the historic performance of the funds. Potential pension fund investors should examine a fund's performance over time and not rely on a company's marketing material as it may only feature selective performance figures.

A difference of 1 or 2 per cent in the annual rate of return can add up to thousands of pounds in the value of a fund over 20 or 30 years. This makes a big difference to the final fund value or income available on retirement.

Before settling on a pension plan, any discussion with a pension adviser should involve your tolerance for risk. Age is also an important consideration when choosing a fund. Younger pension holders can afford riskier investments, which are higher in their equity weightings, while older customers should be in a more conservative investment fund.

When the providers have been narrowed down ask to see a sample of their personal pension fund customer statement. Look for clarity in the documentation as it is very important to know where you stand with your pension. The ability to switch between funds, management styles or managers is another consideration. This is not an investment to make and forget about - a pension should be reviewed every year.

Despite the research required, the myriad choices and the impending introduction of ultraflexible Personal Retirement Savings Accounts (PRSAs), Mr McGovern says individuals should not wait to set up their pension. Every year of delay increases the amount that must be contributed later on. Besides, most personal pension providers will offer a roll-over option into a PRSA when they're launched. Check with your chosen provider to ensure this is the case and that it is free of charge.

Pension funds structure their charges in a variety of ways. Some have a bid/offer spread which is the difference between the price at which you buy units in the fund and the price at which you may sell them.

Pension brokers and advisers charge commission for their services. The maximum commission chargeable at present is 50 per cent in the first year and 4 per cent thereafter. Those funds with no bid/offer spread tend to have higher fees. Most funds charge an annual policy fee usually in the order of £3 (€3.80) per month.

If using a broker or adviser, consumers should consider paying a fee up front to avoid charges and to obtain a 100 per cent allocation of their funds from the start.