Performance is the buzzword of pension fund marketing. Swedbank writes: “The bar is high. And fees low.” LHV claims to be the only one to increase the value of funds since early 2022. And Tuleva says its “performance will never lag far behind the average of the world securities markets”. How do you know who is right in this mishmash of messages?
To quote a classic, “In God we trust. All others must bring data.” If in doubt, check the performance of your pension fund yourself instead of blindly trusting your fund manager. Just remember two things:
First, past performance does not guarantee future performance. Second, banks have an incentive to overstate performance and may sometimes use dishonest techniques to do so. With that said, here are three rules of thumb to stay on track.
1) Check the annual yield. Swedbank’s online banking portal proudly tells me that my second pillar yields 26.89%. Awesome! I’m doing great!
But wait, for which period? Over a period of 5 years, it would be about 5% per year. Over 10 years, it would be around 2.5% per year, and over 20 years, just 1.2% per year. World stock market indices, meanwhile, have fared much better. Therefore, 26.89% doesn’t really tell me much. It would be more accurate to look at the annual yield, which is to say, how much my pension assets have grown on average each year. (1) This also allows for comparisons between different investments.
2) Look at the long-term performance. One pension fund does better one month, another the next month. A month, a year, or even five years is a rather short period to accumulate a pension, and the impact of a month’s return on the eventual pension is tiny. We accumulate our pensions over a long period, which is why we are only interested in long-term returns. Be clear about the timeframe you are examining and look at periods that are as long as possible when comparing pension funds.
Unfortunately, this advice is often overlooked. Frequently checking performance is exciting, especially when you are doing well. (2) Checking your relatively stable long-term return is boring. This is probably why the media keeps talking about short-term performance, for example, that covers the past 1.5 years. (3)
3) Look at how you have done, not the fund. Your personal return may differ from the fund’s return. Your return depends on when you made your contributions, how long you’ve accumulated them, and in which funds.
Pensionikeskus.ee shows the performance of funds over the past 3, 5, or 10 years. In other words, it shows whether the 100 euros you invested in a pension fund exactly 3, 5, or 10 years ago has become 95, 105, or 125 euros. Statistically, this is correct, but it’s not the entire story. Your pension fund consists not only of the money you initially invested 3, 5, or 10 years ago but also includes all the monthly payments you have made over time. To get a more accurate result, you should find the return on each payment and judge it as a whole.
Every online bank in Estonia presents pension statistics, but they never tell you the full story, as no bank follows all three rules of thumb. If you have the time and the Excel skills, you can request the data from Pensionikeskus.ee and do the calculations yourself. But if you don’t, you can check your pension assets’ performance in the Tuleva online app. We did the calculations for you, following these rules.
P.S. It’s okay if you don’t constantly track your pension asset performance. As Bogle recommends, put your money in a low-cost fund and don’t peek.
(1) You can find a more detailed explanation here.
(2) Interestingly, people tend to behave like ostriches. When financial assets are doing well, people check their performance frequently. When investments do badly, people bury their heads in the sand and stop looking at the figures. It’s a kind of self-defence mechanism to avoid negative emotions. Read more in the article The ostrich effect: Selective attention to information (Karlsson, Loewenstein & Seppi, 2009)
(3) For example, the newspaper Postimees recently compared pension fund returns from 31 December 2021 onwards and drew some sweeping conclusions. If Postimees had chosen, for example, a start date six months earlier or six months later, it would have arrived at very different conclusions; investor Toomas did the same.