It’s unfair on a very good IGC report that I focus on its breakthrough feature, but the decision of the IGC to publish the full cost of the funds used within L&G’s defaults needs to be given the headline news.
Here is how the news is reported.
The critical numbers (the ones that have never before been put in the public domain) are the transaction costs which range from as little as 0.01% for the L&G Cash Fund to as much as 0.08% for the multi-asset fund (MAF). The “best endeavours” of the L&G actuaries reduce the average cost of MAF to 0.6% as it is as likely to see costs of 0.4% as 0.8%.
There is a lot going on in this table and I have written to the IGC for clarification on numbers I don’t understand (the reducing Admin and fund charge in life styling). I am not sure if the costs of reinsurance and of the lifestyle transactions (which could be material) are included.
But the central number to take away is that the cost of MAF (which is the main default fund) is not 0.13% but on average 0.19% and the total cost of ownership for the typical Worksave Pension Plan member is 0.56% not 0.50%.
This 12% increase in published costs and charges is not unique to L&G. It will be a feature of all Workplace pensions and I suspect that L&G’s disclosed figure will turn out to be at the low-end of the range.
The publication of this number is likely to cause a great deal of anger at the Investment Association who have been lobbying for any cost disclosure to be conditional on it being at the discretion of the workplace pension provider, how it is displayed.
It of course buries once and for all the myth that hidden charges are (like the Loch Ness Monster) oft talked about but never seen.
And finally it buries the myth that passive investing is not a free lunch. If MAF is incurring costs at the top of the range, those costs are more than 50% again of the stated management charge we had previously assumed was “what the fund cost us”.
From my discussions with the MAF fund manager, I understand these extra costs are mainly incurred because the fund is growing so fast that it cannot lay-off its costs by crossing trades but needs to transact on its own behalf. MAF also incurs higher costs associated with the spreads on bond purchases;( 40%+ of MAF is invested in bonds) ; this explains why costs are higher in MAF than in the similarly successful UK Equity Fund (where costs at 0.2% are two thirds lower).
Why each basis point matters
If anyone thinks this is of academic interest, they should consider my position (I am not putting myself under an NDA!). Until recently I had £400k in MAF which I transferred to the equity tracker, not out of disappointment with MAF but because I couldn’t see the bond holding working in my favour and because I had taken a long-term decision (5 years +) not to drawdown from my fund.
I took the decision with imperfect information (I didn’t know of the cost differential mentioned above). But cost was not the driver, I saw value for me in equities. The information on costs would have made my decision easier.
In taking decisions with our money, surely we should be allowed to fully understand the cost of the funds we choose as well as the value they offer. At a personal level, I am pleased to know that my new fund is delivering me closer to a gross return.
But what can the IGC itself make of this information?
The big question that the IGC must ask in 2018 is whether MAF offers value for the extra money it costs. Not only is MAF more expensive to run, but it has a higher management charge than L&G’s major market passive equity funds. All in, the quantum of value that MAF must add can be quantified as around 0.07% pa relative to the equity alternative.
The L&G IGC did not ask this question this year, but I hope they do next year. The MAF team are earning L&G a minimum 0.13% of £4.5bn
and incurring half as much again in costs. Accountability is everything! Now at last we have the numbers against which a Vfm evaluation can be made!
I consider the decision of the IGC to publish these numbers as they have done as heroic. It could only happen where the provider is allowing the IGC to be genuinely independent and to be acting in the interests of the member not the insurer. By extension, I consider L&G to have behaved impeccably in providing the information and not preventing its publication.
Highlights from the rest of the report
The report itself is good. L&G’s IGC has spent much of the year without a Chair (Paul Trickett jumping ship to Aviva Investors in the Autumn). The new chair will be Dermot Courtier but this report’s the work of Steve Carrodus and his colleagues. The towering work of Tony Filbin in ensuring the IGC never lost its member focus needs to be acknowledged and fully recognised.
I’m pleased to see that the Chair reports on Environmental Social and Governance (ESG)issues (I had criticised it for not doing so last years). I appreciated the photograph of a hamburger shaped bicycle bell – ESG can be too po-faced! During the year, the IGC invited members (me included) to a talk on ESG and very good it was too.
And a few moans
There are less good areas of the Report. The money spent on NMG’s consumer research seems to have produced no special insights for the IGC, merely giving an undifferentiated overview of what people value from their pension. I have commented on this elsewhere, I hope that the IGC does not feel compelled to throw money at such vacuous projects in future.
I am not particularly impressed by the IGCs work with the insurer on at retirement options. The Worksave pension plan is not offering proper freedoms and the modelling tools available to those in the freedom zone are pretty rubbish. This is an area that L&G should be working harder on and I’d have liked to see that reflected in the report, which lacked some of last year’s passion!
I was not wholly convinced that the IGC had won much over the year for legacy pensioners (that had not been required by law). Today (April 1st) is the day when the exit penalties on legacy products are reduced to 1% for those over 55. Some concessions for those in ill-health and under 55 have been granted but L&G’s finance team seem to have successfully batted the IGC back on their more ambitious demand for an extension of the 1% cap to all legacy pensions
As for the bespoke default investment options put in place by advisers, I am far from convinced that the IGCs have got the problem sorted. I’d like to see a “review or retire” demand on those who set these up so that members are not left stranded in inappropriate defaults.
Keep it up in 2017-18!
Despite these minor moans, I really enjoyed reading the IGC report and will give it a green for its tone, which was just about right. I am still not sure the IGC is on top of the life company on legacy but for dogged tenacity in the face of a big beast, I am giving them a green for effectiveness. When it comes to progress on defining whether members get Value for Money, this is a real breakthrough report and deserves every pixel of its green rating.
L&G have been at the forefront of workplace pension governance for the past five years and this report is its most remarkable achievement to date.
you can read the original of the 2017 IGC report here; http://www.legalandgeneral.com/workplacebenefitsResp/igc/