Is pressure building on financial services?

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One test of populism will be the extent to which “populist” Governments take on the cost of saving and investing.

We are used to “bank bashing”, they were the justifiable targets of public wrath for the savings and loans crisis, PPI and most notably the 2008 banking crisis.

We are not used to thinking of the asset management sector in the same terms, but the damage they are doing to our economy is attritional and to date,largely unchecked.

The asset management lobby, organised by the Investment Association, argue that it is a  large contributor to UK taxation and it is. What it fails to mention is that most of the profit on which it pays tax results from tax-subsidised savings. What it gives back to the Treasury, it has been given by the Treasury.

The tax- subsidies enjoyed by individuals and corporations in this country are substantial and jealously guarded by the financial lobbies. They oil not just the saving mechanism but all the parts of the intermediary chain. The beneficiaries of the various tax-breaks surrounding pensions and ISAs are the wealthy both as savers and as the managers of savings.

It would be odd that a Government that is on the side of those just getting by, would countenance the continuation of the “wealth merry-go-round” that is asset management.

I have already redefined “odd” as the new normal in the United States and see little hope that the current administration will curb Wall Street excess (the exact opposite seems to be on the agenda).

But in Britain, I think that change is afoot. The Asset Management Market Study is an uncompromising document – the natural successor to the OFT study of workplace pensions in 2014 and the door-opener to a number of much needed reforms that will serve consumers well. These include

  1. Work on costs and charges focussed on providing a means to calculate value for money
  2. Legislation prohibiting exit fees on personal pensions
  3. A broader definition of the charge cap on workplace pensions.

2017 looks like being a tough one for those who have enjoyed the benefits of the financial services industry without delivering the goods.

The value for money debate

Value for money has become the rallying cry for consumers , but it is already being used as a means for consultants to “roll-out” new products such as “value for money reviews” using primitive market research techniques designed to give the right answer.

I fear many IGCs and Trustees have already fallen for this cod research as a means of avoiding the tough questions about whether the long-term investment of money is delivering or capable of delivering.

I see nothing coming out of the Trustees and IGCs that govern our workplace pensions that suggests in the Chair Statements of 2017, they will have addressed value for money in a meaningful way. I hope I will be proved wrong, but I have uber-low expectations of the 2017 reporting round that kicks off in less than three months.

Clean data – properly applied

What is needed is data – that can us a clear analysis on costs incurred – that can be  applied ex-post to the “gross returns” delivered by workplace pensions. We can then get to the real gross return that has been generated on the assets and assess how much of that real gross return has slipped from the saver to the financial services industry. By understanding this slippage – in its entirety, we can begin to understand what money has been paid for whatever value has been generated.

What is needed is data, but to date we have not got this data. The only area of asset management that is ready to be analysed are the thousands of funds used by the Local Government Pension Scheme – which are about to be analysed by the LGPS to ensure they are and continue to be “fit for purpose”.

The architecture to get the data, analyse it and present it – is in the process of being built and will form a platform from which other projects – including the value for money analysis needed for workplace pensions- can be built.

While such a platform will not be cheap to build, if it remains independent of the vested interests and receives the support of the principal regulators, it can rightly be considered a public utility – and a very useful one.

I am not a data-phile! But I know people who are , and who are keen to build  the platform , the reporting templates and the engine that delivers easy to understand outputs to all stakeholders – from savers through to regulators.

This is the definitive output of the work done on transparency over the past decade. However, it is not in itself enough. Unless clean data , independently verified and properly analysed and presented is used, it is of no use.

The great leap of faith for those involved in building such a utility, will be in the power of the regulators to enforce the use of the data to ensure better outcomes for the beneficiaries of our pension schemes.

A tough time for asset managers

Which brings me back to the start of this blog. We must assume, that a populist Government (as this Government claims it is) will back the Treasury and FCAs regulators (FCA and tPR) in enforcing “value for money” methodology is used.

That means ensuring that the IGC and Chair Statements of 2018 are meaningful in their analysis of the funds available to those invested in workplace pensions and it means that the LGPS is invested in funds that most benefit the LGPS.

When we have the architecture in place to deal with these problems, it is possible to look beyond these two areas, at the wider areas where fund management is employed, defined benefit pensions, wealth management, charitable funds and endowments.

Driving “costs out” and “value to” the consumer

No one should underestimate how hard it will be to provide a sustained value shift from the intermediary (between us and the assets), to us (the ultimate asset owners).

The total cost of intermediation has remained steady for 200 years at around 2% pa. There is no historical precedent for such a genuine shift in value.

But nor is there a historic precedent for the capacity we now have to see, record and play back, where the money is going and where the value is being created.

The means to see what is going on is at last with us, now we must have the will to use it. From the top down, we must make a concerted effort to drive out cost and maximise value, so that ordinary people can restore their confidence in pensions.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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