The opportunity to improve pension fund charging.
Let us pause for a moment and consider what we are buying into when we set up a workplace pension for our staff.
On the face of it, nobody enrolled into a workplace pension since April has had to pay more than 0.7% of the value of their fund in charges.
But that is not in practice what is happening.
For there are two ways of charging members for services. The first is overtly, via the AMC and the second is covertly, where the money is simply paid from the fund to whoever the fund manager wants to pay.
This final statement is deeply problematic to me and I am sure to those who are trying to manage the charge cap from within Government.
At the most extreme level, the manager of a workplace pension could pay a 0.7% AMC and pay five or even ten times that by way of “fund expenses”. The impact of those fund expenses depends on the size of the fund. A £10m fund which is charged £100,000, will be impacted by 1% but a £1bn fund would only be impacted by that £100k charge by 0.1%.
This is one of the reasons why the Pension Regulator is insisting on the master trust assurance framework, not only does the MAF reduce the chance of such charging to the fund, it reduces the number of small schemes with small funds (especially if employers only use MAF accredited funds).
The opportunity for fraud
Since there is nothing to stop a fund manager paying invoices to anyone who they choose to pay, it is not hard to see how this loophole could be exploited by an unscrupulous fund manager. Mates can quite happily charge what they like and pay him his or her cut in a side pocket.
Next week, the Pensions Regulator will be launching a significant campaign to empower people to avoid being ripped off by pension scams. Until recently, it had been assumed that such scams would be perpetrated on those who voluntarily entered into agreements with the scammers. However, it is now becoming clear that scammers can use an auto-enrolment scheme to secrete contributions into their side-pocckets by using charges to the Net Asset Value (NAV) – the practice outlined above.
Nowhere is this more likely than with master-trusts that do not properly explain their investment strategy and do not use the large pooled funds of reputable fund managers.
The argument that small mastertrusts can use innovative investment strategies investing into alternative investments is a very dangerous one. With small funds, managed by pension providers which are not contracting to the MAF, the chances of high (hidden) charges multiply.
We strongly recommend employers , their advisers and the providers of master trusts stick to using the tried and tested funds and do not flirt with alternatives.
If you don’t understand what you are buying, you are purchasing purely. As an employer or an adviser , you are responsible for preventing your members being ripped off.
The need for due diligence
We can feel sorry for people who purchase from scammers, but we can feel angry for people who have their pensions scammed as a result of being auto-enrolled into a fraudulent fund.
Our anger will principally be directed at the scammer, but it will also be directed at those who allowed the scam to happen – because there was no proper due diligence.