Johnson hath spoken! Michael is one of the few people who owes the financial services industry nothing. His voice is independent and trustworthy and his latest contribution to the debate on how we fund our retirement is welcome
Pensions are afflicted by rip-off penalties. The most egregious is an annual charge for “holding assets”, expressed as a percentage of assets which can amount to thousands of pounds per year, each year. To be clear, what is being provided is merely a safe custody service, albeit shrouded behind proffered unsolicited research (invariably unread) as a desperate attempt to hint at value for money. A small flat fee should suffice. Indeed, some Stocks and Shares ISA providers, for example, charge nothing to hold client assets. What is so different about pension pots?
The Government is, to some extent, complicit in this theft. For decades, it has unwittingly granted a licence, in the form of the sanctity of the “pension product” tax wrapper, that has facilitated the industry’s profitable inefficiencies and rent-seeking behaviours. The result is a bloated, inefficient, opaque, over-paid industry that is increasingly uncompetitive on the global stage. The UK’s financial services supremacy, a precious export industry, is rapidly becoming a myth.
Meanwhile, Baroness Altmann, the new pensions minister, described the pensions industry’s post-liberalisation behaviour as “most disappointing”. Her message needs little deciphering: the industry has been warned. Penalty-free pension pot transfers beckon.
The language is harsh and the message plain. Value for money from a “bloated, opaque, over-paid industry” is in short supply.
The complicity of Government is an interesting charge. The charge cap which governs the accumulation phase of workplace pensions and may well be imposed on decumulation, is- if Johnson is correct – legitimising theft.
But how do you make money from a 0.75% pa charge on a “start-up workplace pension”? There are two ways.
- You work damned hard and wait to make your money from your endeavours
- You cheat and make your money from day one by charging whopping management fees to the fund.
And if you think that this cheating is illegal- think again. It is perfectly legal for any service provider, should he be permitted to submit an invoice to the manager of a workplace pension scheme for settlement from the member’s fund, provided that that invoice relates to the management of the fund.
Auditors can do it, solicitors can do it, custodians can do it – indeed the list of potential debtors to the fund is as long as a creative accountant can choose it to be. Provided there is someone in charge prepared to pay the bill, the bill will be paid – from your funds.
Which is why the current 0.75% charge cap may be no more than a front for legitimised theft. What is worse , unlike the usual larceny, you won’t notice you’ve been robbed for years to come. The impact of these bills , spread over a wide range of unit holders is seen in a drag on performance. People simply don’t worry about the performance of their funds in the early years. By the time they get round to worrying about performance, it is usually too late.
There is a very simple solution to this problem, It is called governance. Put at its simplest, fund governance is about making sure the bills submitted to the fund are reasonable and represent fair value. Every bill needs to be sensed checked as you’d expect for your expense claim .
But whereas the people who pay expenses have reason to pay attention, those who run workplace pensions may have every reason to pay a blind eye. If the manager and trustee of the pension scheme are complicit with those submitting the invoices, there is every reason to nod through costs that are simply charged to members. This is the easiest fraud in the world as it is virtually undetectable.
Which is why Government is trying to tighten up the governance of workplace pensions with a master trust assurance framework (MAF) and Independent Governance Committees. The trouble is that they are trusting in the MAF to be implemented on a voluntary basis and allowing the IGCs the freedom to do more or less as they plesase.
The number of master trusts that have adopted the MAF can be numbered on the fingers of your hands, there are hundreds of master trusts, many of them no more than shells, but all of them registered by the HMRC and therefore legitimised.
The Independent Governance Committees run by insurance companies have been in operation since April. They are too young to have done much more than establish their terms of reference. But I worry that they are so low profile as to be invisible to the average member. I know who the Chairs of these ICGs are but do you? Do you know who runs the IGC of your workplace pension (assuming it is run by an insurance company)?
The sad truth is that the system of workplace pensions is run by the Pensions Regulator with the FCA managing the IGCs. The opportunities for those looking to take money from your funds are so numerous and easy that everyone’s up for it. This is why mastertrusts are springing up like weeds on an untreated lawn. A few of these master trusts are good, but I worry that many aren’t.
I am more sanguine about insurance comapanies and their group personal pensions, if only because the barriers to entry are higher and the scrutiny of the FCA and PRA much better funded.
Andrew Warwick-Thompson (Executive at tPR for DC schemes) admitted last week that the standards for many small DC schemes would never match the high standards expected by his “best practice” guidelines.
I don’t just fear bad practice, I fear malpractice.