We shouldn’t underestimate the task the 14 members of the ABI have set themselves in promising to fully disclose charges and costs (see previous blog).
14 insurers have made the pledge but there are many insurers that haven’t nor are the Investment Management Association onboard. However the dam is cracked and the weight of water behind it is growing as £11bn of new money floods into the capital reservoir.
The job of advisers and commentators is to make sure that the job is done and done to time. There are plenty of opportunities to kick the project into the long-grass and without a grim determination to keep the “14” honest, what we might get could be diluted and late. Neither outcome should be acceptable.
So why am I so adamant?
I’ve used a racing analogy to explain the impact of charges and I want to extend that analogy here to make it clear how fundamental an understanding of “what we pay” is to properly educating people why some pension plans work and some don’t.
Imagine you’re livelihood depends on picking horses to win races (maybe it does). A simple assessment of the form of the horses would result in a prediction of the likely result based on past results. But professional punters do not look at the past in isolation. They look at the conditions of the race they are betting on and particularly the amount of weight a horse is carrying.
There are simple equations that equate wight (in lbs) and distance (in lengths). Horses that carry more weight are hampered on a lb per length formula.
The aim of the handicap system is to create a system designed for all horses to finish together with faster horses slowed by lead weights inserted in the saddle.
The weight a horse carries is crucial to an assessment of its charges and though some horses “defy the weight” a horse that is considered to be carrying too much weight relative to its ability is usually discounted.
One factor that will almost certainly rule a horse out of contention is it is carrying overweight – typically because the jockey is too heavy. This means the horse is doubly handicapped.
Sometimes a horse looks beautiful when walking round the paddock, has impeccable form, a great jockey and ground to suit it and yet you will hear the expert punter say it cannot win at the weights. And the expert punter is invariably right!
Now we come to the difference between “weights” and “charges”. Weights are published and verified after the race. There are no surprises and bets are placed in full knowledge of the facts. Weights are a key determinant and any fiddling or non-disclosure would be regarded in racing circles as an outrage.
Picking a fund (rather than a horse) is different. The punter is given limited information about charges (akin to the published weights a horse should carry) but the punter is not told whether the fund is weighed down with additional costs – (akin to “overweight”).
What we are asking the “14” is to work out what the “overweight” actually is and to publish the number. With this information we can advise employers and trustees which funds to offer to members and disclose to members who are bothered what they are really paying.
So many people say to me “pensions are a rip-off” and so many times I reply “sometimes”! In truth, even as a professional adviser , I only know half the story and , given the appalling standards of integrity displayed by the financial services industry in general” , it is no surprise that I will not recommend funds that I do not understand.
The papers are full of stories of pension charges eating up 40% of a person’s pension pot and they are quite right. The trouble is we don’t know which pensions are doing the damage because we don’t know the full story on charges.
Here’s the maths;
While it was once common to find annual charges of up to 2.5pc, the industry now claims it is hard to find schemes charging more than 1.25pc a year. The difference in these figures sounds small but they are critical to how you’ll be able to live out your retirement.
If you saved for 40 years to create a £250,000 pot, it would be reduced to £174,556 with a 1.5pc annual charge and to just £139,986 with a 2.5pc fee. (source the Daily Telegraph)
While I can show you plenty of pension funds with charges of less than 0.5% including some very sophisticated default funds, I can also show you research that shows “overweight” costs of more than 1% per year on top of the stated charge. Total charges (including costs) can easily exceed 1.5%. These numbers are still relevant!
We will not be able to tell people that pensions aren’t a rip-off till we have got to the bottom of the charges mess and , even more importantly disclosed charges and put wealth warnings against funds that don’t offer value for money.
That’s why the ABI’s initiative is so important!
My initial optimism that the “14” were going to provide some common disclosure on charges has been dimmed by reading today’s Pension Week online which states
Adrian Boulding, pensions strategy director at Legal & General, said the next step was to “thrash out” the finer details of the agreement.
“We will look at [an independent body coming] in the second quarter. What it needs is on-going policing and development, and it requires an independent body to do that,” he said.
“The regulator would be ideally placed to do it, but they are not the only ones that could potentially do this. The Pensions Advisory Service is also another option, as is the Pensions Management Institute.”
This sounds to me like filibustering.
The small print needs to be big print and you need to get on with things without involving the world and his dog.
Hiding behind Government quangos and NGOs is no good, putting PAS , the PMI and tPR in charge is a recipe for vanilla fudge. Funds need to be properly measured and the measurement audited by forensic accountants that “don’t miss a trick”
Anything less would be a perpetuation of the current unsatisfactory system of guesswork.
The Office of Fair Trading are on the case, I hope they read blogs like this as well as formal submissions from the usual suspects.
They need to be all over the ABI and the IMA demanding a quick and simple resolution to the calculation and disclosure of all costs within the funds we use to provide ourselves with DC pensions.
Change will not come from those with vested interests in maintaining the status quo. It will come from the consumer champions , form consumers and from advisers fed up with being kept in the dark.
- ABI finally comes clean on pension charges (henrytapper.com)
- OFT rattles pension consultant’s cage -shock! (henrytapper.com)
- Call out the instigators (henrytapper.com)
- Vertical disintegration (henrytapper.com)
- OFT launches investigation into charges on pensions (telegraph.co.uk)
- One way to make company pensions cheaper (telegraph.co.uk)
- Never mind the width – feel the quality! (henrytapper.com)
- “Pensions aren’t dead yet!” January pension play pen lunch (henrytapper.com)
- All change on pensions – a positive outlook for 2013! (henrytapper.com)