Diagnosing the real cost of DC


Insurance (Photo credit: Christopher S. Penn)

A problem with buying  “bundled” DC services is finding out what’s really going on under the bonnet.

I recently blew my power steering pump , I wanted to know what had happened but the pump was in a sealed unit – no warning could be given – no explanation for failure was forthcoming,

So with workplace savings plans;- the problem becomes apparent when people come to buy an annuity – no warning given – no explanation forthcoming!

If the “pension is puny” people ask “what went wrong?”. Whether the reply’s from a  trustee or an adviser or an insurer, “I don’t know and I can’t find out” –  sounds “sealed unit” talk.

My car mechanic told me it was one of those things and tried to sell me a new car.

I told  him I’d like a car with diagnostics that  warn me there’s a problem before my steering wheel locked up!

As a pension consultant and DC Trustee, I would like to have a diagnostics panel that provided proper MI;

  • The AMC , fund expenses and portfolio transaction costs
  • Transition costs during the glidepath into retirement
  • Pay-aways to third parties such as commission or consultancy charging (in accumulation  and as income is drawn).

Secondly, I need realistic  benchmarks that tell me whether these costs are under control.

Thirdly I’d like to have detailed incidence reporting when something is wrong.

As my mechanic told me

If my car is supposed to be doing 40 mpg and is only averaging 30 mpg, I know I’ve a problem but I don’t know why. With a diagnostic report on the engine I can do something about it – maybe an adjustment, maybe a new engine. But I sort the problem before my bank forecloses on my fuel bills!

The reporting on DC pensions has typically been to members and is weak. Fund performance quoted gross  of fees or with a non-specific charge tells the member little about the bundled service. They may be helpful for planning but not as a report on what’s happened. For that members need Fiduciaries- trustees, insurers and advisers

Fiduciaries who really want to look under the bonnet find it hard to get the information they need to properly assess the management of the arrangement.

In one area things are even getting worse- fund managers are now given discretion as to whether they publish their portfolio turnover figures, a key diagnostic is being lost!

If you don’t think Portfolio Turnover Rates matter, read Gina Miller’s comment below – a blog in itself!

But maybe the tide will turn. The decision of 14 members of the ABI to publish “hidden charges” on their DC funds from next year is great news (and meetings I’ve had with the ABI suggest they are determined to do this). Tighter scrutiny from the Pension Regulator, more joined up regulation with the FCA, the publication of the OFT study in August and further details of the DWP’s “Quality Test” all suggest that there will be much greater scrutiny of the management of bundled DC funds going forward.

Meanwhile, it is up to Fiduciaries of workplace savings arrangements, to get up to speed with the issues and put pressure for greater transparency of diagnostic information.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in annuity, dc pensions and tagged , , , , , , , . Bookmark the permalink.

9 Responses to Diagnosing the real cost of DC

  1. ginanmiller says:

    Hi Henry
    Right on the button. It is ridicuous that reporting Portfolio Turnover Rates (PTRs) stopped last June. The IMA say there should not be a focus on the impact of trading costs on returns, because these are an integral part of a fund manager’s stock selection. But it is a valuable diagnoistic tool as you so rightly point out.

    In May last year the IMA issued findings that the actual dealing costs for the largest active funds calculated it to be 0.38% pa but they only analysed the largest 15 funds by size and the larger the fund the less frequently it normally trades.

    According to Morningstar at that time we found that the average turnover of all active UK funds was 91.6% pa but the average turnover of the top 15 funds which the IMA analysed was just 63% pa. In addition, the IMA analysis excludes the implicit dealing costs i.e. the fact that there are spreads between the costs of buying a share and selling it. Based on the IShares latest analysis of the spreads of FTSE 250 stocks (0.56%) and FTSE 100 stocks (0.17%), we calculated a typical spread of 0.23% overall. Therefore, based on the average turnover above, the extra ‘implicit’ costs are 0.11% pa. A conservative analysis of dealing costs would therefore be:
    – Active funds dealing costs as reported by the IMA 0.38% pa
    – Add on extra dealing by the average rather than top 15 sized fund 0.14% pa
    – Add on the implicit costs (spreads) of buying and selling shares 0.11% pa
    REAL TOTAL DEALING COSTS properly calculated = 0.63% pa.

    Given that the average TER of these active funds pre RDR was .56% pa one can see that just these hidden dealing costs alone represent an extra 40% in costs.

    There is overwhelming evidence that funds that turnover the most; the ‘hyper-active’ funds produce the worst performance. For example, we calculated last May that over the last 5 years (where turnover and return data available), the 25% of active UK funds turning over their portfolios the most returned -0.99% pa but the 25% of active UK funds turning over their portfolios the least, actually provided a positive return of 0.42% pa. Investors can therefore conclude that knowing how much the fund manager is turning over a fund is very useful information.

    Christopher J.Traulsen at Morningstar described the non-reporting of PTRs as “a step backwards in transparency”as it makes it much harder for investors to calculate their managers’ hidden dealing costs.


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