Nothing should so encourage Labour about their latest pensions report –Pensions People Can Trust as the outraged reaction to it.
The knee-jerk press-releases from the ABI , IMA and comments from the IFA community are all too predictable.
With self-serving petulance, they have countered Labour’s arguments with technical rebuttals. That Labour used Which’s numbers which were based on a biased set of charges may be technically correct. But such arguments remind me of the little boy with his finger in the dyke – when the sluices have been opened beneath him.
Labour’s report is flagrant popularism. It’s couched in the language of the tabloids and is getting front page billing in the tabloids.
It is a kick in the nuts for those who reckon the way to get trust back into pensions is through better PR. It is frankly a kick in the nuts to all of us – fund managers, insurance companies, advisers and regulators. A proper kick in the nuts I say.
There is no denying Labour’s central contention, that most people neither like nor understand pensions. People who see them as a rip-off are not just the DB diehards in union towers. Take this from supreme libetarian Michael Johnson. (full report here)
At the moment, it is clear that many people invest in products that they do not fully understand, which are governed by a jungle of complex rules and tax regimes that, collectively, almost nobody understands. Savers are therefore putting their trust in the industry, and need to be protected in situations where the industry knows more than they do.
Historically, regulation has tried to improve the relationship between consumers and the industry. This has patently failed. Only the industry can revive its reputation now.
The lack of common purpose between the industry and the public is epitomised by the opacity of the fund management business.
The Investment Management Association (IMA) should no longer be involved in the categorisation of funds, not least because, as a trade body financed by the industry, its interests are not those of the consumer.
Its fund labels should also be scrapped. “Absolute return” funds, for example, promise “at least a meagre positive return”. But in 2011 more than 60 per cent of the funds produced negative returns. “Protected” funds offer an expectation of capital preservation for cautious investors. But last year 11 out of 13 “protected” funds lost money.
Standard pricing for funds is required, perhaps expressed as the total cost of investment, and it should be included in the Investment Management Association’s (IMA) woefully inadequate fee disclosure tables.
The total expense ratio currently charged by fund managers only captures explicit expenses charged directly to the fund. It excludes trading costs, both implicit (primarily the bid-offer spread) and explicit (commission, stamp duty and any front-end and exit charges). In 2010, the City extracted some £7.3bn in implicit charges, about which investors were told nothing.
Simple, fair and transparent pricing in the “opaque, unfair and toxic” annuities market is also required.
The Open Market Option (OMO), which allows retirees to shop around for the best annuity rate, is widely regarded as a failure. Instead, all pension pots should be submitted to an annuities clearing house, where annuity providers would make bids for them. This should be established by the industry itself, but if it does not do so within, say, three years, the DWP should itself establish such a facility.
The language is different, the message the same. The range of commentators quoted in Labour’s document, is making this exact point. WE CANNOT CARRY ON LIKE THIS.
I’m quoted at the back of the report. I’m not endorsing Labour, the report or guys like Gregg McClymont who is driving the campaign, I’m simply making the point that having spent £300m on NEST, we’d like to be able to use it. The ABI think they’ve done a pretty good neutering NEST but when people start connecting the knackering of their state funded pension to secure the profits of ABI firms, they may get Labour’s grouse.
That said the Faustian pact with the ABI was negotiated by a Labour Government (something the report does not mention).
Whether there is sufficient interest in genuine reform of DC pensions is arguable. The DWP’s approach remains pointed towards risk-sharing and not charge-cutting, an agenda that takes the heat off the ABI and is tacitly supported by the providers (being an irrelevance to them and a convenient diversion).
Steve Webb’s Defined Ambition pensions are not an irrelevance to those of us saving for our retirements , Defined Ambition pensions make sense, especially if the risk-sharing is meaningful (see blogs passim). However they are not going to sort out the sins of the past.
When it comes to the brass tacks, Gregg McClymont’s tabloid offensive on rip-off Pensions is exactly what is needed. It is roundly to be applauded. Otto and all in ABI la la land may moan as much as they like, but without a strong and coordinated attack on hidden charges, provider margins, poor annuity choices and market distortion, how are things going to get better?
If we could only lift up our eyes from our spreadsheets and do some strategic thinking, we’d be grateful that Labour are trying to clean up our act.