Straight talking from the IMA on charges?


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In one of the least incisive video interviews I’ve seen this year, here’s Ian Smith of Pensions Week quizzing Jonathan Lipkin- IMA Director of Public Policy Decision- on how the IMA and its members are facing up to the challenges of 2015. The 6 minute video is here.

The background

The IMA and its members are charged with disclosing the real costs to members of workplace pension funds of fund management. To do this, they needed to work out a formula that includes not just what is charged overtly to the trustees or managers of a contract based arrangement, but what is charged indirectly to a member’s fund (the hidden charges).

The worry within the DWP and FCA is that more you cap the overt charge, the more managers find ways of increasing hidden charges which erode the “Net Asset Value” of your pension pot.

So the DWP are requiring the disclosure of the hidden charges  by 2016 and making sure that those governing occupational schemes (trustees) and GPPs (IGCs) are able to see whether members are getting value for money from these additional costs.

IMA obfuscation #1 -talk about something else

The tried and tested way of responding to these kind of pressures is to obfuscate. This word means to cloud the subject in smoke. The particular smokescreen being used at the moment is to pretend that the asset managers are far too busy responding to the challenges of the budget tax reforms and their impact on the default funds which they operate.

Let’s be quite clear, this is none of the business of asset managers. Asset managers are here to provide asset management , not to devise default funds. If their marketing departments decide they want to make themselves attractive to the people who buy their funds by suggesting default strategies- ok. But managing existing money comes first.

It is, in any case , impossible to accurately establish what people will invest in after April 2015. Firstly we can’t second guess individual choices and secondly, until a new default decumulation strategy takes hold, we have no idea what those who don’t take choices will end up not choosing (but investing in).

Faced with their being no default product and no information on what people taking choices will do, the asset managers would be better off getting their house in order and complying with what they have been asked to do by the DWP, the IGCs and scheme trustees.

IMA obfuscation #2 – pretend it’s somebody else’s job

So back to Jonathan Lipkin and his smokescreens. The second smokescreen is the IMA’s contention that the charges within their funds aren’t really important and what really matters is the annual management charge which is “not much” to do with them.

It is true that the cost of asset management to schemes and contract based management is a relatively small part of the Annual Management Charge. The AMC has to pay for administration, member communications as well as all the junketing that goes on to encourage people like me to recommend one scheme or CPP over another. The cost of fund management to the scheme of GPP managers may be less than 0.05% pa.

But what is the cost to the members of the fund management?

That is the great unknown

The cost to the members may be many times more than the cost of the fees. Recently Railpen admitted that following an internal investigation they discovered it was paying five times as much in hidden costs as the headline fee for fund management.

Railpen’s is an extreme example, it was investing in notoriously expensive fund management techniques , most of which would not be included by those creating and managing DC default funds.

Why it is absolutely the IMA’s job and why it matters

But this is the point. Until the IGCs and Scheme Trustees who choose the default fund strategies know how much these strategies are really costing, they cannot make a decision.

And until the IMA and its members agree a formula to properly disclose these charges, the people who make the decisions about the new defaults won’t be able to make informed choices.

And until the IGCs and Scheme Trustees get the information about hidden costs they will not be able to comply with their duties post April 2015 which include reporting to members of the Schemes and GPPs on the default (and other) funds offered them. This reporting must specifically mention the quantum of costs being born by members within the funds they are being asked to use.

Trustees and IGCs can report on everything else, they can show nice pie charts that demonstrate how the AMC is divied up between admin, comms, reserving distribution and “corporate overhead”. They can even include a slice for what they are paying for fund management. But that is only telling half the story.

What the IGCs and Scheme Trustees cannot tell members is what is being taken from the fund’s net asset value by way of hidden charges – the costs of dealing , of currency hedging, of  broker research (still bundled into dealing costs) and the market impact of the execution of trades.

This shameful dissembling must stop

It is absolutely wrong- shamefully wrong – of the FT to allow its pension magazine to be used as a PR soapbox for the IMA.

It is shamefully wrong of the IMA to imply that it is trustees and contract based managers who are lagging. They cannot define the AMC till they have the management information the IMA and its members are with-holding.

The AMC will be defined by subtracting both the cost charged to the trustees or GPP manager for funds and what is taken out of NAV from the 0.75% cap. The remainder of the annual charge pay s for the fixed costs and anything left over is the scheme or GPP managers to keep.

So Ian Smith at Pensions Week, these are the two questions you should have asked

  1. When are the IMA’s members going to publish the total cost of the fund management (both explicit and hidden)?
  2. When are they going to stop meddling in default design and public disinformation campaigns on AMC definitions?


What the Government are doing to sort this out

There is some good news on the horizon. We don’t have to listen to this kind of nonsense from the IMA  much longer.

The FCA are working out a formula which ICA members will have to use to calculate hidden costs. This “Government Intervention” has been deemed necessary because the IMA and the ABI would not publish a satisfactory formula themselves.

I have written elsewhere on this blog about the IMA’s continued support for shocking malpractice such as the bundling of broker research into trading costs (a form of soft commission). The FT have recently reported on the practice of some fund managers of putting trustees buying their funds under a “non-disclosure agreement” to make sure that where low prices are demanded- they are not made generally available to the market.

Why this Government Intervention happened

The DWP and FCA interventions are happening because the IMA and its members arrogantly refuse to comply voluntarily with what their customers can rightfully claim to be “best practice”.

I see I have a meeting with Jonathan Lipkin in my diary on November 11th and you can be quite sure that what I am saying in this blog, I will be saying to his face.


And how’s this for barefaced cheek?

Oh and if anyone wants to hear the Jonathan Lipkin view on investment governance – including his top tip to take DC governance seriously – try this little beauty from May 2013.

If you need the IMA to teach you about DC Governance – you’ve got a problem!

APTOPIX Britain RBS Protest

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Straight talking from the IMA on charges?

  1. ginanmiller says:

    Very well written Henry and absolutely on the nail. The IMA continually show that they are incapable of either a grown up conversation or representing our vital industry and the wider societal responsibility we are here to serve. They only people they are interested in serving is themselves and their greed. A bunch of overpaid civil servants.

    • henry tapper says:

      Thanks Gina, I take it you and Alan aren’t members!

      My birthday is a laugh a minute, apart from meeting Jonathan, I have to meet the CEO of Hermes, a bunch of Italian administrators before flying to Scotland for an event on Wednesday.

      This is what happens when you don’t plan ahead.

    • henry tapper says:

      Civil Servants?

      I hope that I am not paying into their pension scheme!

      Thanks Gina!

  2. Henry

    You are going to have fun on your birthday! What part of enabling good member outcomes is considered by the IMA to be included in their current stance?

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