Magnus Brilling – CEO of Alecta

How much does it cost to actively manage Alecta, Sweden’s largest workplace pension provider? The answer, according to Magnus Billing – is 0.024% of the funds assets each year. That’s less than 1/30th of the 0.75% cap imposed by the DWP on workplace pensions in 2014.

For those who don’t think price is an issue, let’s remember that over a lifetime of investment, thanks to Jo Cumbo for highlighting a fee disclosure note on an Aussie Super

Small differences in both investment performance and fees and costs can have a substantial impact on your long-term returns.  For example, total annual fees and costs of 2% of your account balance rather than 1% could reduce your final return by up to 20% over a 30 year period

Put another way, the saving in Alecta‘s  costs gives you a 10% pay rise for your entire retirement (relative to the charge cap).

Alecta is the prize to which those who care about value for money should aspire, it is the benchmark for what a master-trust can do and it achieves such remarkable efficiencies for a number of easy-to-understand reasons.

1. It’s been around since 1917 (yes 1917) and is now valued at 82bn Euros. By doing the same thing well over time it has achieved economies of scale which it gives back to the staff of the 34,000 employers that use it
2. It’s an insurance company, with the protection that brings to members.
3. These 34,000 employers that use Alecta, also own it, all profits are ploughed back and ensure the 2.3bn members of the scheme get the best pension possible
4. Members have single accounts (an important lesson for NEST). This means that as they move from job to job, they do not have a proliferation of Alecta “pots”.
5. Alecta invests directly into around 100 companies and keeps those stakes for decades, by cutting out fund managers it also cuts out dealing costs.
6. Alecta is an activist investor with clear principles; it’s buy and hold approach enables it to make a positive difference to the companies it invests in.
7. Alecta is an early adopter of ESG principles, as Magnus Brilling says “Providing the highest possible returns for the lowest cost is our aim — but there will be no beneficiaries of pensions on a dead planet”

I’m grateful to Owen Walker of the FT for collating this information and refer you to his article on Alecta (Jan 4th).

A couple of lessons for UK workplace pensions

Over the next few months, the chairs of IGCs and many or the master trusts will be preparing their statements on value for money.

For yet another year, they will be doing so blind. While they may have a better idea this year of the true cost of investment for members and employers, their statements “in my opinion XYZ is offering value for money to you” will be as vacuous as all previous statements.

“Value for money?” –  relative to what?

If the benchmark is what has come before in the UK, then most workplace pensions are offering value for money.

If the benchmark is the DWP 0.75% charge cap, most workplace pensions are offering value for money.

But if the benchmark is Alecta, and I see no good reason for Britain not to aspire to the standards of its Nordic neighbour, then we are offering very little value for money.

The determination of value for money must be based not on what others are doing but on what can be done. If Alecta is doing so much for so little, why are we congratulating ourselves over our workplace pensions?