Pension planning: Looking back to see into the future

A survey published earlier this month by Bank of Ireland Life found that 95 per cent of people aged between 30 and 45 are looking forward to spending more time travelling or pursuing further education when their time comes to retire.

While that is a lovely thought, they’ll need to be able to afford it first and, to be honest, it’s not looking good for them. The same survey found that three-quarters of this cohort are pretty sure they won’t be able to live on the current State pension – which is just over €200 a week – but despite this certainty that they will be skint when they get older only half have started putting money aside for their future life of long-haul flights and life-improving literature.

But if you did have money – even a little bit – what should you do with it? People telling us what we should do with our cash are ten a penny, and banks, brokers and fund managers are all very quick to assure us that we will be better off if we entrust whatever cash we have to them. And maybe they are right. But how can we tell? It is impossible to look 20 or 30 years into the future and predict with any certainty what will become of us or our pension pot. But what about the past?

Although all the ads remind us that “past performance does not indicate future performance”, a look back to a time when politicians bugged journalists’ phones with impunity and racehorses disappeared at gunpoint may shed a bit of light on future money matters.

While rates of return are obviously important in any investment, so too are rates of inflation, so that has to be the starting point if we are going to find out what happened to the investments made 30 years ago.

So let's start there. The annualised rate of inflation from the beginning of 1983 until this month stands at 2.9 per cent, according to the Central Statistics Office, so whatever investment our imaginary investor made back then will need to have performed better than 2.9 per cent or they will be in a very bad place right now.

The big investment for many people over the last three generations has been property. How has property fared since 1983? If we were answering this question five years ago the answer would have been “like a rocket”. We might have even capped up those three words and added a few exclamation marks into the bargain. Sadly, it is not 2008, so the returns on a modest property investment made in 1983 are not so impressive any more.

Let's say you bought a four-bedroom house in a perfectly middle-class estate in Galway city for £58,000 and signed the papers in January 1983. The euro equivalent of that investment is €76,644. The property today is probably worth €300,000. It could be more or less, depending on how well is has been maintained and what other property is for sale in the area, but as a ballpark figure it is probably close enough. These numbers would put the annualised return on the investment at 4.8 per cent, which is not terrible. It is not, however, great either. A Dublin property may well have performed better but not a whole lot.

But buying property is not the only thing people were doing with money back then. An Post has long had a number of attractive savings accounts for people to invest. And no, we're not talking about your savings stamps here – the returns on them were, by any measure, rubbish. We're talking about the long-term limited access savings accounts.

If our make-believe moneybags invested the equivalent of €1,000 in An Post three-year tax free bonds on January 1st, 1983 – okay, they might have had to wait until the 2nd – and cashed it in the middle of September 2013, they would have got €4,396, according to figures given to Pricewatch by the National Treasury Management Agency.

(Incidentally, you might wonder why NTMA is giving us An Post figures. Because when you open a long-term savings account with An Post, the post office has virtually nothing to do with your money once you deposit it. It merely passes it up the chain to the big boys. But we digress.)

While turning €1,000 into €4,396 might seem like a pretty sweet deal, it only works out at a rate of annualised return of 4.94 per cent, better than property in Galway but not by much.

An Post (or NTMA) did (and still does) have better investment opportunities available. So if the €1,000 had been invested in its five-and-a-half-year after-tax certificates back then, our investor would have watched it grow to a not-too-shabby €5,677. This works out at an annualised return of 5.82 per cent – or nearly three points more than the average rate of inflation over the past three decades.

Significant risks
It's better but still not great. So what about the stock markets? That looks to have been where the real money has been made over the past 30 years. But the stock market isn't for everyone and comes with significant risks.

The canny investor back then, who wanted to take some risks but not too many, would have looked to a managed fund, typically the most common fund owned by people in pension funds over the past 30 years. These tend to be invested in a mixture of predominantly equities with the remainder invested in property, bonds (government and/or corporate bonds) and some cash, so they are not as flaky as some other equity-based investments.

If the €1,000 was put into the average managed fund as a lump sum investment, it would now be worth €7,936. This is the net fund and assumes an annual management charge of 0.75 per cent plus bid/offer charges of 5 per cent.

The real winners in our back-to-the-future experiment are those who put their cash into an occupational pension scheme, as the €1,000 in an average such scheme 30 years ago will have grown to €19,830 today, an annualised rate of return of 10.22 per cent.

Of course, some pension funds have done better than others. Standard Life Investments' managed fund, for instance, could have grown the €1,000 into €21,730. "Those who invested in equity-based funds were well rewarded with significantly higher returns than deposits over the last three decades," says Brendan Barr, head of marketing at Standard Life. But then he would say that, wouldn't he?