What is forward pricing and how does it impact my pension plan?

There are a variety of factors which may affect the value of your pension such as inflation and interest rates. Whilst factors like these have an influence on the value of your pension balance, they don’t ultimately determine the price at which the assets in your pension can be bought and sold.

The way the price of a fund is calculated differs depending on whether the investment fund uses forward pricing or real-time pricing. Forward pricing is the method by which all PensionBee funds are priced.

What is forward pricing?

Forward pricing is used to calculate the price at which the shares in your pension plan can be traded for. There are two main features that characterise forward pricing.

Timing of fund pricing

The price of any orders to buy or sell, which are placed when the markets are open, will be calculated after the markets close on that day’s trading period. Further, the actual trade won’t be executed until one or two days later. This means when a trade in a forward price fund is carried out its price will have been determined at an earlier point in time.

Priced once a day

A forward priced fund is only priced once a day after the markets have closed. This stands in contrast to the alternative method of pricing a fund, real-time pricing.

How does forward pricing differ from real-time pricing?

Real-time pricing is most commonly associated with exchange-traded funds (ETFs). ETFs are a type of investment fund made up of an array of asset types such as stocks and bonds. ETFs are traded on stock exchanges throughout the trading period of the day. Unlike forward priced funds, a fund using real-time pricing is constantly changing.

A real-time priced fund’s traded throughout the day, just like company shares. As buyers and sellers interact with each other, demand and supply will cause the price of the fund to rise and fall. As a result, this type of fund’s priced every few seconds during a day’s trading period, giving the fund a continually fluctuating price at which it can be bought or sold. As trades are being made the change in the value of an investment can be seen immediately.

How is the forward price calculated?

The forward price of a fund’s determined by calculating its ‘Net Asset Value’ (NAV). The NAV is defined and also calculated by deducting a company’s liabilities, such as its debt, from the total value of its assets.

Relatedly, the NAV per share (NAVPS) is used to calculate the price of a single share whereby the NAV of the fund’s calculated first and this number’s then divided by the total number of shares held by a company’s investors. The resulting number produces the cost a single share can be bought or sold for.

Is the forward price different from the market price?

With a forward priced fund its NAV is the same as its market price. This is because the price at which the shares in a fund can be bought or sold is only calculated once a day.

However, real-time priced funds such as ETFs are traded throughout the day where supply and demand i.e. the number of investors looking to buy or sell, will cause the fund’s market price to be pushed higher or lower than its NAV.

How does forward pricing impact my pension?

Your pension balance

Ultimately, as the performance of the markets move up and down, any change in the value of your pension won’t be immediately reflected in its balance. For example, if the overall performance of the markets grow over the course of a week then the value of the assets in your fund will generally also grow as a result, however, it could be several days before you see an increase in the size of your pension balance.

Purchasing power of your funds

The forward price of a fund also impacts the purchasing power of your invested funds. It does this in two ways:

  • The price of the shares you can buy
  • The number of shares your investment is able to buy.

Price of shares

The price of a share may be higher on one day and lower on another. As the price of shares is calculated after the time an order to buy or sell is placed, you won’t know exactly the price at which your investment will be able to buy or sell those shares for.

For example, an order to buy some shares is made at 3pm on Monday before the trading day has closed. At this point, each share is valued at £1. However, the price at which each of these shares will actually be bought is calculated after the next valuation point, which will be at 5pm on Monday when the markets have closed. After being repriced, each share is now worth £2, so the order to buy shares on Monday will be carried out at £2 per share.

Number of shares

When the price of a share decreases, your invested funds are able to buy more of them but fewer when the price increases.

For example, an order to buy £100 of shares is placed at 8pm on a Monday. At the time the order is placed, each share in the fund’s worth £12. However, when the fund’s are next priced after the markets close on the following day, Tuesday, each share is now worth £10. If your order was carried out at the time it was placed at Monday’s share price, a £100 investment would have bought 8.3 shares. However, at the repriced value of £10 per unit, £100 will now buy 10 shares in total.

Why does PensionBee use institutional funds?

At PensionBee, it’s important we give our customers maximum protection for their pension. To do this we offer funds which qualify for the Financial Services Compensation Scheme’s (FSCS) highest level of protection. The FSCS has two levels of pension protection and the amount each covers depends on the type of pension fund.

Pension funds which the FSCS qualify as a ‘contract of long-term insurance’ are covered at 100% of the pension amount, without any upper limit. So, even if your pension’s worth a million pounds (or more) you’re covered for the total amount, in the event that your pension provider fails. Funds which are structured as contracts of long-term insurance are most commonly found in institutional pension funds such as those typically offered by workplace pension schemes and where forward-pricing is a common feature.

In contrast, other types of pensions work as retail funds such as Self-Invested Personal Pensions (SIPPs). As these are structured differently from institutional funds, they typically only qualify for the lower level of FSCS protection of up to £85,000 per pension scheme member. In the case of consumers who are moving away from a workplace pension, they may lose the 100% FSCS protection they have when transferring to a retail pension fund. By offering funds structured as contracts of long-term insurance, PensionBee customers continue to receive this benefit.

As well as understanding how your pension is invested it’s also important to understand how it’s protected. Whilst other pension providers will offer FSCS protection, it might not be the higher level you would get with the types of funds offered by PensionBee. If your pension provider failed after 1 April 2019 the FSCS can pay 100% of your claim with no upper limit. Protection covering 100% of your pension with no upper cap is unique to pensions which the FSCS qualify as a contract of long-term insurance. By choosing to offer institutional funds that are structured in this way our customers benefit from the 100% FSCS protection afforded to them.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 03-08-2022

Ready to consolidate your pensions?

Get started in 5 minutes. Why not take a look now and see how easy it could be to take control of your pensions?

Get started now

Mobile PensionBee analytics chart Mobile PensionBee analytics chart
Mobile PensionBee analytics chart
Apple Store logo Google Store logo

Have a question?Call our UK team020 3457 8444

Monday-Friday: 9:30am-5pm