Once upon a time when the world was young and 10% returns fell into your lap like apples in autumn, no one worried about product costs
And then John Denham MP started digging and invented the 1% world of stakeholder pensions.
And he was right to call an end to the skullduggery of with-profits (even if it just morphed into the skullduggery of hedge funds)- the black art of charging everything to the policyholder had to stop – and it did.
And some insurance companies woke up to price constraints and the stupid ones soldiered on till they became extinct.
And the smart ones revamped their admin systems, introduced self-service, STP and paperless offices and cut their admin overhead to next to zero.
And the stupid insurance companies continued to market inefficient proprietary active funds and the smart ones bought passive funds at next to nothing.
And the stupid ones continued to pay commissions untill they were derailed by successive waves of regulation culminating in the RDR
And the clever ones sold their pensions on a no-load nil commission fee.
So within ten years, the cost of your DC pension fell from 2% per year to about 0.35% per year which, because of the impact of compound interest, is the difference between a rubbish pension and a good pension.
And the stakeholder pension had done its job.
Which is where we’ve got to today. Dirt cheap pensions- no advice- passive defaults and a load of pension people looking around for a job-especially pensions investment people who need a job more than most because they’ve got their kids in private schools and they need £100k pa just to meet their overheads.
Cue the rise of the DC investment consultant, bright-eyed and bushy tailed, fresh from de-risking the last DB portfolio and keen to bring LDI to DC through target dated funds.
Hard luck guys- you missed the boat. If yo want to get your DGFs and LDI based DC defaults and your stochastic models back into play you are going to have to sell that stuff through the insurers.
You’re going to have to ski uphill like a crazed biathlete in Vancouver because you are going to have convince a bunch of employers that they want to tell their employees their pensions aren’t going to be dirt cheap anymore.
And their super low charged passive defaults aren’t the thing anymore.
And in fact the thing to do is to invest in hedge funds and private equity and swaps and all of that.
And this ain’t going to happen.
This ain’t going to happen because you can’t bounce a bowling ball, you can’t ski uphill, you can’t put up the price of a contract based pension.