The Investment Research Partnership

Expert Witness Case Study 2

Pension drawdown portfolio using inappropriate funds

Case summary

A pension fund, transferred into a drawdown arrangement and initially providing maximum income under drawdown rules, was decimated when there was a significant market downturn leaving the portfolio highly depleted and unable to meet future income requirements.

The solicitors instructions.

The solicitor for the beneficiaries requested a review of the risk (volatility) of the funds used in the portfolio. In particular, the funds which were investing into non sterling smaller companies. The instructions also requested the expert to review other funds from the company range which would be more suitable taking into account the income requirement and the preservation of capital.

The investigation.

The instructions to the expert witness were:-

a) review the funds selected by the IFA

b) calculate the volatility of the selected funds

c) compare the fund risk/returns to suitable benchmarks and peer groups

d) calculate capital losses

The above requests were duly under taken. In the process of reviewing the case notes and investment reports, the expert was able to suggest that the instructions be extended to include:-

1) review the risk/return characteristics of other funds from the pension company

2) action the IFA should have taken at various intervals

3) action or instructions the pension company should have made or considered to the IFA.

The expert’s report

The investigation showed that the funds selected were not suitable for the pension beneficiaries objective and risk requirements.

The report showed that the IFA failed to take action once capital losses started to occur and failed to notify the client of the situation. The report also highlighted that the pension company had not intervened when losses became noticeable.

The report also showed what a more appropriate portfolio would have produced and from this quantum was calculated.

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