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Pensions - are you getting what you’re paying for?

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Do you know where your pension fund is invested? Chances are it’s something that you’ll never have given a second thought to. Even if you did, and you had a look through your scheme’s documents, can you be sure that what you might find is an accurate reflection of what’s going on under the surface?

A recently published study of pension schemes by the Society of Pension Professionals (SPP) has shown a dramatic difference between where schemes believe their funds are being invested and where the underlying companies actually make most of their money.

The SPP looked at the geographical allocation of around £20billion in defined contribution default fund investments, compared to the economic exposure of the companies. What it found was that “the country of a country’s primary stock market listing does not necessarily reflect the geographical diversity of its revenue base”.

Although the funds had, on average, a 41% allocation to the UK – that is, 41% of the total fund was invested in UK stocks – when looking at where companies made their money, this fell to just 13.6% - or about a third of the supposed total investment in the UK.

Similarly, the funds’ exposure to the Japanese economy (16.6%) was more than double its geographical allocation (7.5%).

Looking at funds’ allocations to emerging markets – countries typically with fast growing economies that are catching up with the developed world, such as China, India and Brazil – showed the true exposure to these countries was over a fifth of the total fund (22.9%), almost four times as high as the headline investment (6.1%).

In some ways, this is unsurprising. It’s long been accepted that the country where a company is listed doesn’t necessarily reflect where it earns most of its money, but the study throws into sharp relief the extent to which this is the case. Looking at the Q4 results for US-listed Apple, for example, shows that over 60% of its revenues came from outside the US, with over 22% from Europe and 13% from China alone.

Equally, London’s HSBC derives a whopping 96.2% of its revenues from its overseas operations – in that case, can HSBC really be called a ‘UK company’?

Does this matter? It depends on your point of view. Default funds are where over 90% of fund members end up, and are therefore designed to be the ‘goldilocks’ option of pension investments – not too risky, not too  conservative, but just right for the vast majority of people.

Getting that right depends to a large extent on investment experts balancing risks based on factors including broad, country-based allocations. As the SPP report notes: “Ultimately, the danger is that a hedging and risk management strategy may be based on an exposure that is somewhat distant from the reality.”

However, the point of a pension scheme is to invest and generate money to provide an income in retirement. There’s a strong argument that schemes should invest where there are the greatest opportunities for growth – the UK contributes just 2.3% of global GDP, according to the International Monetary Fund. In this case, a higher allocation to emerging markets might make sense.

A final point, and some food for thought. Europe is currently worked up about the fate and future of Greece, a country with a GDP of around $240-250billion. China, which has just had its ‘slowest year of growth in 24 years’ grew by about $1trillion ($1,000billion) in 2014. Put another way, the Chinese economy added the equivalent of four times the entire value of Greece in a year. Ask yourself, which country is the future?

This article has been commissioned by retiresavvy and any opinions voiced are the author's own.

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