Savvy punters will drive down pension charges.

Inefficient markets – don’t you just love ’em! We all love a bargain whether at the local boot or in the stock market.

There was a time when I believed I could pick a stock or a horse and beat the market maker or bookie. Time and experience have “learned” me. The stock market, (and the bookies) are a lot more efficient than I thought and I’ve decided that if I can’t beat them, I’ll join them or at least invest in funds that don’t try to outwit them.

I had that complacent feeling that with a public school education and plenty of friends who were fund managers, I’d be able to get along fine. The losers would be the poor mugs who kept on buying the wrong stocks and shares.

I soon discovered there is no mug like an arrogant public school idiot.

These days, most day-traders (like me) have packed their bags . But there are still punters  who reckon that while they can’t pick stocks, they can pick funds. And there are plenty of managers and advisers who reckon they can make a living from fostering their blind faith.

No matter how good your horse, he cannot carry much more weight than the other horses and win. The smart punter will not bet on a badly handicapped horse. The same goes for funds; you can’t beat the market if your fund is so overweight with charges that it just can’t keep up. The only difference is that the weights a horse carries are declared and the charges some funds incur aren’t.

I want market returns at low charges. I’ve been brought up on real assets delivering a long-term premium over debt and that if there’s a free lunch, it’s in diversification. Give me a nice cheap diversified growth fund and I’m happy. But give me a DGF that costs as much to administer as it costs in charges and I’m wondering why I bothered. If I can’t even work out what I’m paying in charges, I’m out.

I reckon I’m in the vanguard of the new savvy punters-I know what I want (and I know how to get it) and if there are as many of me as I think there are , then the funds industry is not going to be quite so conspicuous at Twickenham, Wimbledon, Henley and the Olympics as they are today.

All the corporate advertising, not to mention the ostentatious champagne guzzling, is adding to the disgust of savvy punters like me. Do fund managers think all this isn’t being paid for by the investors? Do they think we’re dopes?

This inefficient market is based on people being dopes. You can fool some people all the time but…this is not going to last much longer.

Will Aitken, one of the good guys in the funds industry has asked me why this price pressure has not come sooner.

My answer is that ineffecient  fund managers (and the platforms from which they distribute)  are facing a perfect storm that’s going to blow away all the nonsense. It will refocus debate on the things that matter- proper diversification , low charges and appropriate asset allocation as we approach retirement.

2012 will see some 500,000 people buy annuities. The baby boomers are reaching retirement but the cost of buying a pension is at an all time high. The pensions people are getting from DC are way down on expectations (created by statutory money purchase illustrations). The public outcry is picked up on the radar of politicians , consumerist groups , think tanks and journalists. There has never been a worse time to be DC ineffecient.

With the prospect of 10m new DC savers in the next five years and the rest of us  relying on uncertain DC pensions to fund our retirements ,the stakes are higher than they have ever been. The advent of frog-boiling- auto-enrolment attracts the attention of those in governance – including those in Government. Other than those in Government- we’re all in this together.

There’s an opportunity for fund managers here, but they’re going to have to be a lot skinnier than they are right now – if they are going to be able to take it.

The ABI are keen to point out that the price for new workplace savings schemes has fallen over the past ten years, what they don’t mention is that there has been no reduction in prices for those on old contracts (who represent the vast majority of DC savers and savings).

The ABI should be looking at their legacy books and driving out the inefficiencies. If they do so and pass on their savings to their customers, I will be impressed by their arguments. If they try to fob us off with lower charges on new pensions, they will be busted- not least by

There’s clearly something going on at grass roots level. It’s not just the Pitt-Watsons Michael Johnsons and the Martin Lewis‘ who are railing against high costs of pensions.  Those who are retiring today on pensions of £20 per month are railing against the whole damned DC pension system.

Take this comment from someone in payroll moaning that she’d have to auto-enrol her staff into pensions

” I am still of the opinion that pensions aren’t worth the paper they are written. I paid in for a few years and I am likely to end up with less then £20 per month! I could have invested the money elsewhere and earn more! I am putting all my savings into ISAs and probably government bonds. This way I am guaranteed my capital a well as some income.” (sic)

I suspect that she hasn’t got a strong technical grip on what’s happened but her anger is a start. If I could get her to channel all that rage into understanding why she has such a poxy pension then she could be a part of the solution. Of course, the inefficiencies of the fund industry aren’t the sole reason for her poxy pension but it’s likely to be a major contributor.

What I see happening, what I hope will happen, is that with this rage against poor outcomes, will harden into serious enquiry. People will start standing up to the ABI and IMA and ask the difficult questions. The NAPF are asking them, the RSA are asking them, Michael Johnson’s asking them and the Labour party are asking them, and slowly the truth is coming out.

And when the truth about costs and charges is out, we will start to get properly educated. We will start to have a generally savvy customer who will lead us to an efficient and transparent  market. This is a market devoutly to be wished for.

There are already a number of funds which are efficient and there are some savvy purchasers who have made sure that a very large number of people are invested in them. The funds are generally passive funds, the purchasers are the employers and their pension trustees who have set up DC plans on a company wide basis and if you are in such a plan, you are probably invested in an efficient fund , paying low charges, getting proper information and getting a proper return.

The inefficiencies of the market were created by people who invested in funds which were inefficiently managed in the hope they would get something for nothing – outperformance from a fund manager‘s skill – what’s called “alpha”. This is a bet on a hunch and usually a bet with a high price tag. Alpha has been in short supply, most of it destroyed by high charges.

There’s a savvy customer emerging who has woken up to the fact that betting on the skill of a fund manager with high charges is a risky bet. I have no objection in them taking that bet, but I do question how many of those taking it understand the nature of the risk.

It only takes one savvy customer per company for all those within the company to benefit from his or her good stewardship. These savvy customers will be the trustees of the future, they may not sit on “trust boards” as we know them, but they will be the guardians of value for themselves and their work colleagues.

The days of the fund manager’s unquestioned authority are over as are the days when they can charge what they like to their customer’s accounts.

They have been rumbled by some consumer facing pension experts and they are likely to be held to account by politicians. They need to be more than a little careful that they don’t become the new bankers. They need to watch out for their fastest growing demographic- the savvy customer.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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