A year after the changes to the rules surrounding ‘protected rights’ eligibility for SIPP investment, Laith Khalaf of Hargreaves Lansdown investigates where protected rights investors have been putting their money.

It has been one year since the Department for Work and Pensions instigated what may well come to be seen as a landmark event in private pension saving. On 1 October 2008 the barriers were raised on £100 billion of pension savings that had been accumulated by investors who contracted out of the Additional State Pension (also known as SERPS or S2P).

From that date onwards, these ‘protected rights’ were no longer held captive in insurance company personal pensions – new rules meant they could now be transferred to a self-invested personal pension (SIPP).

We estimate that 50,000 people have exercised their new-found freedom and have transferred their protected rights pension to a SIPP; more will undoubtedly follow. This subtle change in the rules establishes SIPPs as a mainstream pension. Indeed, the long-term implication is likely to be that SIPPs will become the predominant form of individual pension in the UK. With protected rights on board, SIPPs can now do everything that personal pensions can do, but better.

Moving with the times

The largely mediocre insurance company funds that are available in personal pensions will no doubt trundle on; there will probably always be a proportion of pension savers who want nothing to do with the running of their pension fund. However, this proportion of reluctant investors is declining. People are realising that their pension is an investment, and that if it doesn’t perform well this will have a very real impact on their comfort in retirement.

Performance is particularly relevant to protected rights when you consider hurdle rates. A report commissioned by the FSA in 2005 revealed that in order to match the state pension benefits given up, protected rights investments had to return 2.6 per cent to 4 per cent above earnings growth.

Earnings growth can be expected to run at around 4 per cent, so we are talking annual returns of between 6.6 per cent and 8 per cent. This level of return is possible, but means you are going to need a good fund manager, if not a team of good fund managers, at the helm. Either that or you are a keen stockpicker yourself who feels confident that you can generate those kind of returns.

The most popular protected rights funds

So where have protected rights investors been putting their money, and how have they been doing?
The box shows, in alphabetical order, the most popular funds in the protected rights portion of Hargreaves Lansdown’s Vantage SIPP, and how they have done over the past year. Of course, individual investors could have bought in at any point during the year, and so done better or worse than the annual performance figure suggests.

These performance figures date back to 1 October 2008 and, therefore, the aftermath of the collapse of Lehman’s, which is why some funds are posting such positive returns. Nonetheless, these figures do serve to highlight that there has been money to be made in the past year, largely due to the rally that has occurred since March.

Two of the most popular funds for our protected rights investors have also been new launches: Artemis Strategic Assets and Cazenove Absolute UK Dynamic. The Artemis fund is managed by William Littlewood (who ran the Jupiter Income fund in the 1990s, with great success).

This fund gives the manager a free rein to invest in those assets in which he sees the best investment opportunities, so the fund can blend higher-risk areas such as shares and commodities with more conservative investments like cash or gilts, depending on the manager’s reading of the economic situation. He can also make money from falling prices as he has the ability to short, although if he makes the wrong call then shorting can lose money too. Much depends on the fund manager’s acumen, therefore, which we believe to be first class.

The other new launch is the Cazenove Absolute UK Dynamic fund, managed by Neil Pegrum. As the fund name suggests, this is an absolute return fund, seeking to make positive returns whether markets fall or rise.

The fund was launched in September and we notified our clients that we thought they should act sooner rather than later because Cazenove planned to stop investment into the fund when its value reached £100 million.
Sure enough, the fund closed immediately after it launched as Cazenove had hit its quota. While this is disappointing for potential investors, we think that this is a good thing for those who squeezed into the fund at launch. By capping the size of the fund, Cazenove has made sure that it doesn’t become too big and unwieldy. Closed funds do sometimes reopen to new investment, so further down the line there may be a further opportunity to invest.

Consistent favourites

Apart from the new launches, the top ten includes two emerging markets funds, a gold fund and a corporate bond fund. There are also no less than three funds run by the same man, Neil Woodford – Invesco Perpetual Income, High Income and UK Equity Pension funds.

The performance of these funds over the past year has been less stellar than some other UK funds, largely because Woodford is still steering clear of banks. However, pension investment is a marathon rather than a sprint, and the fact that three of his funds are in the ten most popular tells you what pension investors think of his chances over the full distance.

These ten funds represent some of the best fund managers working in their respective sectors. That is the attraction of a SIPP. Not only do investors have a wide choice of sectors, but within those sectors they have a choice of managers, allowing them to pick what they think are the brightest prospects for the future.