There is a deal of concern about the proposed charge cap. People are needlessly worried. Here I’m listing five misconceptions about the Government’s intentions. For once, I want to outraged of London/Edinburgh to “sit down – shut up“!
Misconception one – “we don’t need a cap- charges are already below 0.75%”.
It’s about the legacy stupid!
The charge cap is not about the good new schemes that already display value for money. In fact, were it not for the current crop of workplace pensions that offer charges below the cap, the Government would not have gone after the ‘back-book’.
The Government’s proposals are drawing a line in the sand and saying that from April 2014 or some such date, no-one need have their pension savings in high-cost poor value schemes. It may not get there in one go (see misconception five) but it will set the platform for a fairer system
Misconception two – “the fully inclusive charge has not been thought through”
That’s why this is called a consultation- the DWP need help!
The easily disgruntled PJ Zoulias on his natty new blog http://www.highcontrastconsulting.com , argues that the DWP don’t know what they are doing and that they are trying to tell Steve Webb that “a green piece of paper is green”.
This is half true, the DWP know the direction of travel- to a charge cap where you don’t push down in one place to see the charges pop up in another (like thrapping moles at the fairground).
The DWP don’t have a proper definition of “charges covered”. Gregg McClymont has rightly pointed out that a month is too short a period to consult on this, but because of the political importance of getting this on the statute book in April 2014, a month is all we’ve got.
The other half of the story is more positive. A simple solution does exist, as my recent blogs have explained, it involves us splitting transactional costs into costs earned (which should be included) and the impact on the market (which can’t). We have a simple way of doing this which even includes unpicking the bundled costs in bond spreads.
The point for PJ and Gregg is that answers to the questions raised by the DWP as to what should go into the charge have been delivered to the DWP and tPR and if Bridget Micklem has a better solution, then it will have to be very good indeed!
Misconception three – “everyone has got it in for us”
It is still within the hands of the financial services “industry” , to put its house in order, but time is running out.
To listen to some of the whinging at me and to me from insurers and from employee benefit consultants, you’d think I’d written this consultation paper. I didn’t, I know the woman who did and a more intelligent and sensible and mild-mannered young woman, I have not met for some time.
The DWP is not populated by anarchists and communists trying to bring down the City or indeed the City of Edinburgh. Nor is it against EBCs. It is full of talented young people, mainly female who look at financial services practice, especially workplace pensions practice and “are surprised”. Frankly anyone who takes a step back and asks what is going on should be surprised- what has happened up to 31/12/13 is pretty shocking- we said as much all through last year.
So conspiracy theories , such as PJs are absurd and Gregg – we should have a chat!
Misconception four – the charge cap is a conspiracy against the rich.
Today’s poor are tomorrow’s rich – if we keep our hands off their funds!
PJ makes the point that a charge structure that relies on a charge on funds redistributes costs from those with no funds to those with lots of funds.
This ignores the positive. The positive is that those with no funds today, should have lots of funds tomorrow, especially if they aren’t paying overly-high charges.
Pensions are like mortgages but the other way round. If someone with a £100,000 mortgage found out that they had a £1000 charge added to their debt for no obvious reason, then nearly as much again next year and in decreasing amounts for 25 years they would be outraged.
That’s how pension charges work- except the other way around. The reason that the insurers and fund managers are so rich is that they are enjoying a feeding frenzy on the mature pots of those who started saving 30-40 years ago.
PJ’s argument misses the point that we have to protect those with small pots today from ending up being pillaged tomorrow.
It also misses the point that those with high charges today (e.g. those in rubbish old schemes) need to have a new scheme with low charges to move money to. If an old scheme has high charges and the member is happy to pay them- that’s fine; but we need to define the difference between “inert acceptance of high charges” and “activism among the general population to move money from rip-off to proper workplace pensions. Which leads me onto the final point.
Misconception five – this intervention goes too far.
The financial services community is in the last chance saloon, change or be changed is the message from the OFT and the DWP
Au contraire Roderick! This intervention is the beginning but it is not the end. I recently requested the Prudential to allow my workplace pension fund in their stakeholder pension, to transfer to my new workplace pension with another insurer. I was quoted a service standard of ten working days between the point my money was disinvested and the point it would be sent to the new provider. During this time I will earn no interest on the money and I will be out of the market. There is a possibility that the market will fall and there is a chance that it will rise in the 10 days – but there is no chance that I can avoid this “out of the market” risk. It is an outrageous period to wait in a digital age.
I quote this as an example of an insurer who simply does not get “treating customers fairly” and considers that so long as it can get away with this bad practice, it is unacceptable. So long as this kind of behaviour goes on, and it is endemic in the funds and insurance industry, the more they will invite Government intervention onto their heads.
The final point of this article is this. If an activist like me is finding such barriers to transfer, what chance the average investor. Pot-follows-member initiatives that deal with what happens in the future are fine, but what about the past.
The next stage of intervention will come when the Pension Regulator and the FCA finally work out what is good- FULL STOP! When we start quality testing back-books (as the OFT suggests we should) using the Pension Regulator’s powers on occupational schemes and the new Independent Governance Committees within the insurers, then the time will surely come when the earth will be full with the glory of ‘good’ as the waters cover the sea.
This post originally appeared at http://www.pensionplaypen.com/topthinking