More than a third of AVCs are invested in deposit-based funds, despite industry consensus that such ...
More than a third of AVCs are invested in deposit-based funds, despite industry consensus that such investments are only suitable for those close to retirement, according to a survey by Bacon & Woodrow.
The group's 2000 AVC survey also shows that three-quarters of AVC schemes offer members the choice of both with-profits and unit linked investments.
Anne Freeman, a consultant on Bacon & Woodrow's specialist defined contributions team, said: "This is a disproportionately high level of contributions paid to deposit-based funds. While such funds have their place in the AVC market to provide capital security for those close to retirement, they are not expected to produce as good a return over the long term as with-profits and equity-based unit linked funds. There may be a need for better communication of the investment options available and more guidance on making the right choices."
With-profits has been the traditional home for AVC contributions. However, there is a widening gap in the performance levels of the various AVC providers, according to the survey.
The return on a with-profits fund for someone paying £50 per month over five years ranges from £3,392 with Eagle Star to £4,113 for CIS investors, representing a gap of 8%pa.
Managed funds have continued to outperform with-profits over both five and 10 year terms on the back on strong investment performance throughout most of the 1990s.
The average returns of managed funds took a big jump particularly in the five year period ending in 1999, compared to the five year period ending 1998, due to the strong performance of funds throughout 1999.
CIS was the top with-profits performer over the past five years returning 13%pa, ahead of the survey average of 10%pa. Over a 10 year period, CIS again outperformed other with-profits providers with returns of 13.8%pa compared to survey average 10.8%pa.
In unit linked managed funds, Skandia Life was the best performer over both five and 10-year periods with returns of 17%pa and 14.9%, compared to the survey average returns of 13.6%pa and 12.8%pa.
Bacon & Woodrow highlighted that there were huge variations in the level of charges applied by providers. The reduction in yield figures, which effectively translates all the charges to a contract into an annual fund charge, range from 0.7%pa up to 3.7%pa on a five year investment.
Andy Cox, partner and AVC expert at Bacon & Woodrow, said: "The most expensive contract would have to produce an investment return 3.0%pa better than the cheapest contract to make up for the difference in charges."
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