Most people now have a DC workplace pension and if you haven’t got one you’re either very lucky (as you’re accruing a defined benefit) or one of the 6m marginal employees who are reckoned to be “entitled”, “non-eligible” or “self-employed”. (The Government is coming to your pension situation as part of Matthew Taylor’s workplace practice review).
You can read the document here https://www.fca.org.uk/publication/consultation/cp16-30.pdf
Most people now have a DC workplace pension which is chosen by your employer and looked after either by trustees or independent governance committees (IGCs). The FCA- the Government’s principal financial enforcer has been uncomfortable about the protections ordinary consumers get for some time. The concern became stronger after the 2013 report by the OFT that concluded.
The OFT report recommended that people not being looked after by Trustees should have equivalent protection through IGCs and the IGCs have been up and running since April 2015. In April 2015 the IGCs reported that they couldn’t properly tell if workers were getting value for money from their workplace pensions because they couldn’t get the proper information out of the investment managers about how much people were actually paying to have their money managed.
I and various other people have been calling for better reporting of costs for some time now as these things matter. Now at long last, the FCA have produced suggestions on how the hidden costs of fund management can be reported consistently to IGCs and (for master trusts and single company pensions).
This matters and matters a lot. The FCA estimate the assets measurable by this proposal will rise from £320bn to £390bn over the next five years, tiny differences in costs measured by basis points (bp) of 0.01% can deliver enormous variations in the pensions we get – over time. These differences can define a good from a bad workplace pension as the costs that the FCA are examining are measurable and manageable. Getting these costs down is something within the grasp of fund managers. In theory getting costs under control is good all round
But in practice, there is likely to be short-term opposition from many fund managers and their trade bodies. Greater disclosure does not just mean more work, but it means – for those with high costs – a lot of extra explaining. Where there is a charge cap , the Government might seek to include these extra costs within the cap, excluding high cost managers from offering services to workplace pensions.
I hope that we do not have to exclude high cost managers through a cap, I hope we can instead measure whether their high costs produce value for the money. If it can proved they do, I would be happy to see high-cost funds being used by people for their retirement savings.
In order for IGCs and Trustees to work out value for money they will have to look both at the theory of what a fund manager is doing in the process of adding value and the practice. The practice is a lot easier, a simple examination of the track record of the fund’s performance can tell us how well the theory has turned into practice!
It may be that finding value from high charges proves very difficult. If this is the case then a simple charge cap that includes all the costs of investment will be useful. If high cost managers always under-perform and theory doesn’t turn into practice then we should do without high-cost managers.
In future blogs I intend to look in detail at the FCA consultation. It was a long time in the baking but the first reads suggest that it is likely to deliver the right level of information to help IGCs and Trustees determine whether value for money is being had.
If my first feelings are right and I will take steers from those in the Transparency Task Force better qualified to make that judgement, then the publication of this consultative document will be a big step in the right direction.
But – as Steve Bee’s cartoon points out – no matter how low the charges – the main determinant of what you get out of a workplace pension – is what you put in!