Angela Eagle’s stunning Bill on pension costs and charges

Angela Eagle presented a bill to the House of Commons at 1.30 yesterday (Wednesday May 8th). It is a fine bill and I wish it success. It may not succeed under the current Government and may be no more than a marker for the future. You can see it in Hansard by following this link.


 

I beg to move,

That leave be given to bring in a Bill to require pension providers to publish standardised information on charges for pension products; to make provision for a cap on such charges; and for connected purposes.

My Bill will introduce greater transparency in the charges applied to pension savings by those who manage them on behalf of the beneficiaries, and introduce a mandatory cap on such charges.

The aim of the Bill is threefold: to drive down significantly the total cost of pension fund management; to achieve better value for money in what is currently a failing market; and to ensure that a higher proportion of pension savings will actually go to help the beneficiaries to achieve a comfortable retirement.

Currently, far too much of people’s hard-earned savings is being siphoned off in hidden charges and costs, and without firmer Government intervention this is likely to get worse rather than better. As a former pensions Minister, no one knows better than me how quickly eyes can glaze over at the merest mention of this subject, but the wellbeing of our society demands that we get this right. Currently, 34 million of our fellow citizens are either paying into or benefiting from pension savings, and the welcome introduction of automatic enrolment has brought millions more into workplace pensions saving for the first time. The automatic nature of this saving means that there is a special duty on the Government to ensure that funds accrued in this way are used to generate pension benefits for savers rather than profits for fund managers and intermediaries.

Despite the welcome cap of 0.75% on costs in these pension funds, it is clear that much more needs to be done. All the evidence demonstrates that this is a failing market. It suffers from information asymmetry for both customers and regulators, it is characterised by very weak if not entirely dysfunctional price signals, and one of its most revealing features is persistent and very high profits for those who supply services, which is the classic sign of market failure.

The pensions being offered are complex by design. Providers are being allowed to conceal many hidden charges that eat away at the individual pension pots in defined contribution schemes, under the noses of their clients. One particular pension product was discovered by consumer champions Which? to contain 44 different charges that could be levied on the fund. Price signals are weak because small, innocuous-looking fee levels can eat up massive amounts of an individual’s savings over time. As the Royal Society of Arts study led by David Pitt-Watson demonstrated in 2012, an annual fee of 1.5% can eat up a massive one third of a pension pot in 25 years.

Despite there being billions of pounds of savers’ money under management, it is not yet possible for any individual workplace saver to find out how much it actually costs them to be a member of their pension scheme, let alone to be able to compare these costs with those levied in other schemes. Thus, astonishingly, when it comes to pension saving it is currently completely impossible to assess the cost of any one scheme against another. It is impossible to make any estimate of what the value for money of any particular scheme will be, yet this decision is crucial to an individual’s future wellbeing and prosperity. Those 13.5 million members now automatically enrolled in defined contribution schemes are trapped in an employer-chosen fund where their only choice is whether to stay or to leave and forgo the valuable employer contribution. That is surely the definition of Hobson’s choice. In reality, it is no choice at all. It is no wonder that the Office of Fair Trading pronounced the pensions market for buyers to be “one of the weakest” that it had analysed “in recent years.” The answer to that problem is not more complexity and faux competition, but transparency of total costs and fees. There should also be a cap on charges.

Necessary transparency can be achieved only if charges and costs are comparable and easily understood across the sector. A mandatory cost disclosure framework defining how to calculate such costs is therefore vital. The results must then be a prominent part of the statements sent to every saver annually. My Bill would mandate transparency across the board on pensions charges by introducing a mandatory cost disclosure framework with independent verification. It would also establish a cap on charges during the accumulation stage of pension saving and crucially extend that to the decumulation stage, when the pension savings made are actually taken.

Pension products should quickly become more standardised and simplified, as they are in the Netherlands, where this reform has already been successfully introduced. In the Dutch case, introducing transparency led to an immediate and huge 31% fall in the cost of managing pensions per scheme. The beneficial impact for savers cannot be overestimated. Just as small increases in costs can eat up large amounts of a pension pot or fund over time, so small cost savings can lead to a huge improvement in fund size over the same period. Dutch regulators calculated that a cost reduction of only 0.25% would result in a massive 7.5% increase in collective pension assets over 40 years. Just think of the benefit that would accrue to all savers from a 31% fall in fund costs should that be achieved here in the UK.

My Bill aims to enable pension savers, rather than fund managers, to accrue a much higher proportion of the benefits generated over time by saving into a pension fund. Such practical and meaningful transparency also enables trustees to pursue their fiduciary duty much more effectively to achieve value for money for the beneficiaries. That makes them potentially a much more effective force for good.

Caps on costs also have a vital role to play in delivering better value for pension savers, which is why the Bill extends their use far wider than is currently allowed. As Unison pointed out in evidence to the Select Committee on Work and Pensions, 90% of total costs paid by pension funds are linked to asset management. Asset managers are making record profits, but analysis demonstrates that this is rarely as a result of high performance outcomes.

As I mentioned earlier, in the case of auto-enrolment, a cap of 0.75% has been introduced. That was predictably opposed by fund managers and there was a shift from active to passive fund management as a result. The outcome was that funds that tracked the market passively made better returns than those that had actively invested and charged far higher fees. Evidence demonstrates that both actively and passively managed funds did not outperform their benchmarks when fees and charges were taken into account. In my view, that shows the urgent need for caps on charges.

The advent of so-called “pension freedoms”, which allow savers access to their money early, has created even more fertile ground for pensioner rip-offs. Yet there is no transparency and no caps are applied in circumstances of early drawdown. The cost of drawdown products, which now proliferate, needs to be included in moves to establish transparency and cap costs.

In 2016-17, £15.3 billion was removed early from pension savings—three times more than in the previous year, yet research by Which? has discovered wildly different charging structures and costs associated with the supply of those drawdown products. The highest prices are charged by some of the best-known providers, including by levying heavy fixed fees, set-up charges, administration charges and more general rip-off prices, exploiting the trust in a good brand name. That dubious practice would not survive price transparency and charge caps on drawdown products.

The Bill will mandate cost transparency and caps on charges to drive down cost and drive up value for money for pension savers. It is a timely and necessary reform. Without this further regulation, we will let down millions of pension savers and provide an ongoing bonanza of unjustifiably high profits for fund managers and intermediaries who exploit their power in a complex and failing market.

The time for the Bill is now and I commend it to the House.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Angela Eagle’s stunning Bill on pension costs and charges

  1. DaveC says:

    Future prosperity is a function of overall ROI, not fund costs.

    Is comparing funds internal costs really that important? Shouldn’t ROI on the investors statement be the only factor that counts?

    AgeWage seems to be the kind of driver to push down internal costs as it makes comparing ROI easy, and ultimately businesses wanting to compete can only do it two ways. More performance or lower fees/costs.

    What am I missing?

  2. henry tapper says:

    Dave – you are spot on – the impact of costs is only one aspect of the value for your money equation. At the end – what matters is good outcomes.

    But we need to be sure that the “money”side is measured and that people know what they’re paying for

  3. Bob Ward says:

    Costs are still a major factor, as good fund performance means higher fund values and thus higher fund charges which are usually based on a percentage. Costs therefore become exponential.

    The background costs can often be as high as the headline fund charges Providers advertise to attract new business, yet the background costs are still not transparent enough. Despite Regulators’ attempts at obtaining this information, providers are delaying and avoiding disclosure as long as possible but there have been no fines or sanctions imposed for lack of compliance.

    On the charge cap point, besides capping the underlying fund and transaction charges, the headline rate for Default funds for workplace pensions should be capped at 0.5% pa. Most Default funds consist of passive fund of funds which are designed to smooth out volatility in the longer term and should have relatively lower transaction charges or direct management. The underlying funds are often available for 0.1% – 0.2% so there is no reason for the Auto Enrolment Default funds to be in excess of 0.5%.

    Charges overall should be split between the fund charge percentage and the admin charge disclosed on a monetary basis. The latter should include ALL costs whether explicitly deducted from members’ balances or implicitly paid by the Employer. ANY payments by the Employer will be pooled in the company accounts as expenses of pension provision and therefore influence the total amount available to Employees’ remuneration

  4. DaveC says:

    Personally I feel that if competition exists in the market then you should be able to spot the best products for your needs based on ROI and existing regulated reporting.

    Consumers drive competition in the market place.

    What use is knowing costs if you should be choosing on ROI? Would anyone genuinely not take the best ROI because they’re so good that they can also take high fees?

    Perhaps apathy is a problem for both end users and intermediates in the pension > investment market?

    As noted, in this context AgeWage should drive consumers to choose more wisely with basic metrics, and maybe that’ll trickle up to pension investors who’ll just start to be a bit more activist in their job, rather than expecting those they buy off to do all the work for them.

    If there is more to it than that, please enlighten me.

    I’m sure it’ll make good reading for the layman’s need in understanding why a free market mechanism doesn’t work here (ie, me)

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