I had a number of meeting yesterday culminating in an afternoon spent with members of the Transparency Task Force (TTF), with the FCA and with certain interested observers.
I can report the meeting happened and what was said but not by whom, as ever – transparency does not extend as far as personal accountability – well not when it is focussing on such a sensitive subject as how asset managers make their money.
Let’s remember that we we pay for the management of our pensions is limited to a charge on the accumulating fund known as an AMC. The AMC cannot be more than 0.75% of the value of the fund (though that 0.75%) can comprise a fixed member charge (as NEST , NOW and some other trusts do). Any charge made to the employer for administrative assistance can also fall outside the charge.
That at least is the received wisdom. But it is not the end of the story.
If you start digging into the fund accounts produced by asset managers , you find lines and lines of further costs borne by members which are not part of the AMC but are charged to the “net asset value” of the fund. These costs are measured and published and they can be substantial, in some cases they can be bigger than the AMC, more than doubling what a member is bearing as the total cost of having a pension.
If you dig some more then you discover that yet more money is being lost to the member’s pension pot by the trading of the fund. The more the fund trades, the more costs are incurred. Trading is not bad- in most cases trades are legitimate and designed to improve the return to members, but trading can be done well or badly, depending on how skilled and bothered those executing the trades are.
The further we dig into the matter, the less audited the costs are and the greater the scope for bad execution and even deliberate malpractice.
There is currently a move among pension providers to divert attention from the proper investigation of these ‘hidden” charges towards those nice things that providers think we value.
Like instant access to our account values on the internet
Like the capacity to switch between a wide range of funds
Like fund modelling tools, gamification and integration with SIPP, wrap and ISA products.
Like the prospect in years to come of a range of options with which to exercise our pension freedoms
And a whole load more.
Sadly for the providers, the general public are less interested in these things and more interested in what they get out of their pots (relative to what they put in).
So “value” for the providers is an artificial construct which consists of brochures, web-portals and incessant surveys on “what people want” framed to prove that if people knew what they wanted, they’d want to pay for all of the above and not worry what was leaking out of the back door.
Here is the simple economics lesson.
The asset managers have learned how to charge the product providers next to nothing for their product. I know of one “deal” where the master trust is paying between 0.02 and 0.03 of one percent for asset management.
The product providers are charging members between 0.5 and 0.75 of one percent for managing the pension fund.
But the asset managers are paid on average £200k + pa and have swanky City offices and pay their shareholders well. How can they make a profit from such a small charge? Why are they so keen to manage assets for us through workplace pensions?
The answer is simple – asset managers- including passive managers – have numerous ways of making money out of our money in a cloak and dagger way which is neither disclosed or properly audited.
It is simply economic to spend money as a product provider getting people to look at the value of their product features while spending no money at all scrutinising whether members are getting value for the money that is being lost to their funds to pay the asset managers.
Here is what we need to do
- people interested in value for money from their pensions should tell their IGCs and Trustee boards that they want full disclosure of what the member borne charges are within the default funds into which they are investing
- they should put pressure on the DWP to come up with the formulation for the charge cap (v2.0) due in April 2017 and what it will included that is not included in the charge cap (v1.0) launched in April 2015.
- they should contact Andy Agethangelou, subscribe to the Transparency Times and (if possible) attend TTF meetings.
- they should watch the lips of David Cameron and other senior politicians who are at last talking about doing something about transparency
- they should take with a pinch of salt any research carried out by anyone in the name of value for money which does not focus on the real cost in monetary terms of whatever value is supposed to be created.
Value for money is tough
Providers find “value for money” tough to measure and tougher to disclose. That’s because it is a scarce commodity. The vast majority of the value is pocketed by those who manage our assets and the wrappers and apparatus which present our pension pots back to us.
The asset managers and those who have constructed the apparatus we are asked to buy into via auto-enrolment or otherwise, are keen to keep things the way things are.
They will use all kinds of means to stop things changing including attempts to shut me up.
But I’m not going to stop writing about this and hammering on the FCA/tPR/DWP/Treasury’s door till we get action from Government to put consumers back in charge of what they buy.
The IGCs are bodies set up to help people both see and get value for money. There are other bodies, including the FCA/tPR etc. There are occupational trustees charged with maximising the efficiency of DB and DC schemes.
How much of the BHS pension scheme’s deficit sits in the pocket of the pension industry I wonder?
How much of that 13% pa return I was promised when I took out my first personal pension sits in other people’s pockets?
These are the questions that Government, trustees, IGCs, employers and members of funded pensions should be asking, are asking and are getting frustrated not getting answers to.
They’ve done it in the Netherlands.
The Dutch have done it, they’ve gone a long way down the road to discovering what we are actually paying for their funds.
Now that they know what they are paying, they are figuring out what they are getting value for their money.
The Dutch are learning how to work out whether their asset managers and pension providers are doing a good job
Value for money is tough, but the Dutch are getting there. It’s been a long time coming, but change is going to come.