LCP, the pensions consultancy, yesterday published its first DC Fees Survey and very good it is too. It confirms what we knew, that the investment fees and charges for some DC funds are not transparent, that they can be as much as 100% higher than those quoted but that this is not a universal problem.
The implication is obvious, if you are in the know, you can use funds that can offer better returns with lower risk at a reasonable price. If you don’t get help, you may end up with a fund that gives you the worst of all these worlds.
There is nothing wrong with this approach, LCP are a commercial organisation who are clearly after the business of those who read this report - hopefully the trustees and managers of DC schemes who are considering the funds to offer their staff both now and when they stage auto-enrolment.
This is hugely important stuff. Millions of pounds will be invested in default funds and if those funds cost twice as much as advertised, there are millions of pounds worth of litigation in the pipeline if members take class actions against the employers or trustees or platform managers that failed to protect the interests of those they had a fiduciary obligation to.
Unfortunately, as my consultancy also knows, people would like this research and do not want to pay for it. The Government‘s agenda is clear about this, Steve Webb has repeatedly said that companies should be able to stage auto-enrolment, including chosing the pension savings mechanism, without taking advice.
The Government’s position is clear. If you are not prepared to put in the hard miles to research the investment options you offer your staff or pay for people like LCP to do this work for you, then you have a default option which is backed by the DWP with close to £200m of tax payer’s investment. That option is NEST. NEST is a safe harbour for employers not prepared to take advice and , though it may not be perfect, it is considered to be a pension savings vehicle with proper governance – not just by Government but by every pensions expert I know.
NEST does the basic job of allowing you and your company to Stage auto-enrolment. It allows you to comply with regulations. It is not necessarily the best solution for your staff but using it will not create regulatory compliance issues or allow your employees to sue you.
Most companies will be more ambitious than that. They will look to set up a pension savings vehicle for staff that concentrates on getting the biggest back for the contributory buck they can. The solution , when all options are considered , may still be NEST, but many employers are proving they want to fully understand the market and I’m very glad they do.
What concerns me, and concerns me a lot, is that it is only the likes of LCP and a few other specialist consultancies (of which First Actuarial is one) who are the guardians to the keys to this very specialist stuff. The difference between a good and bad default investment fund for a DC plan is huge. If you look at the charts that fill the bulk of the LCP DC Fees Survey , you get a feeling for the amounts that get sucked out of pensions by inefficient and sometimes greedy charging structures.
Unless you are talking with advisers who are as expert as LCP, you won’t get any of this detail. Frankly, most of the advice floating about on Diversified Growth Funds is based on “finger in the air” value judgements.
If Steve Webb is going to intervene in the pensions charging debate, this is where he should do it. There is a solid case for a Government Enquiry into the true costs (including the transactional costs ) of Diversified Growth Funds and other variants – especially structured products - being touted as default funds for DC plans. If the result of this Enquiry is that certain funds are named and shamed as being bad value - so be it. This is too important a public agenda item for the research to be cobbled together by Saga or Which or Money Saving Expert from scraps falling off the consultancy table. Gregg McClymont take note, now is your chance to point the finger and demand this in the house.
And LCP are letting these funds off lightly, they do their calculations on the charges pocketed by the fund managers and quite ignore the rest of the charges which are passed on to third parties. My advice to LCP going forward is to include “transactional charges” in their calculations . Frankly, to the trustee, corporate sponsor and most of all the member, who is getting fat on their fund is not the issue, stopping them gorging is!
- Japanese Knotweed – the spread of passive defaults. (henrytapper.com)
- NEST’s been gelded by the ABI – this is the result! (henrytapper.com)
- “Pensions people can trust” – a proper kick in the nuts. (henrytapper.com)
- Is Steve Webb at war with personal pensions? (henrytapper.com)
- Time for a “4G” Pensions auction? (henrytapper.com)
- Send in forensic actuaries to sort out these “rip-off” pensions! (henrytapper.com)
- Pension firms may get to hide charges (telegraph.co.uk)
- Savvy punters will drive down pension charges. (henrytapper.com)
- “The first cut is the cheapest” – transferring legacy pensions (henrytapper.com)
- Pensions Bindweed- pretty and deadly (henrytapper.com)
- DC isn’t working says Hymans Robertson- I agree – let’s change that! (henrytapper.com)
- DC road testing – August Play Pen Pension lunch (henrytapper.com)
- Pensions minister issues warning over high fees (independent.co.uk)