Workplace pensions – what we pay and why we pay it!

David Hutchins

David Hutchins , who is the presiding genius at Alliance Bernstein, a firm whose investment services power many workplace pensions has written a strongly worded piece in the FT that calls on product providers to ensure savers know what they are paying from their growing pots and why.

He highlights two areas where greater transparency is needed – firstly in understanding the difference between  the quoted price for exiting a pension fund and the price we actually get and secondly the balance between what a provider pays itself and what it pays third party suppliers.

This may sound “technical”, but in understanding the value we receive from our pension money , it is vital. Hutchins comments

We estimate that less than 25 per cent of the charges borne by members in typical master trusts are now going towards services that aim to increase the value of their pot. More than 75 per cent are going in administration and plan management.

That is a very disappointing statistic in our view, and comparable to a hospital spending only a fraction of its budget on medical staff and equipment.

This is a theme that dominated my blogs in 2017 when I was trying to discover what pension providers were actually paying fund managers. The answer was simple “mind your own business” as we are under a non-disclosure agreement. The difference between what the master trust providers charge you and what they pay to third parties is the margin they work with. You cannot tell this margin from their published accounts and you certainly can’t tell it from their statements to members.

The worry is that to create margin, providers cut down on the costs of investment management to maintain a competitive edge on the all important annual management charge by which they are typically judged for value for money. But this (in Hutchins’ view), leads to a stifling of innovation in investment product.

It may also lead to what Steve Webb used to call the “waterbed effect” where by pushing down on charges on one side of the bed, you push charges up on the other. The implication is that fund managers will get their pound of flesh one way or another and “the other” may well be through manipulation of  technical matters such as what amount to hidden exit costs.

A governance matter

There is a real conflict here for pension scheme trustees. Hutchins points out that DC pensions are subject to cross-subsidies. Managing the “who pays” is fiendishly difficult.

Take Legal & General who historically had an annual management charge (AMC) which reduced the bigger pot and now have a flat-rate fee.

Take Pension Bee who reduce fees the more money you have with them.

Take NOW pensions who have a fixed monthly  management charge as well as a percentage fee on the assets.

Take Peoples Pension who started with a pure annual management charge and now have both fixed monthly costs and a tiered AMC.

All of these approaches to charging have merits and can be justified by trustees as addressing cross-subsidies in different ways. L&G get those with big pots to pay for those with small ones, Pension Bee do the opposite, NOW protects itself from small pots by making small pots pay their way and People’s Pension have tried to balance all the cross subsidies (and created the most complicated charging structure).

However, none of these explicit charging structures tell us what members are really paying for fund management. Hutchins suggests that we are still not being told the full story.

Without clear, comprehensive disclosure of all investment costs it is impossible to make a true appraisal of VFM. Future regulation should focus on greater transparency for employers and members.

This should include not just clear disclosure of what the total member-borne costs and charges are, but also how and why they are incurred. Only then can fiduciaries make VFM judgments with confidence.

Although we’d like to feel we were being treated fairly on matters such as exit charges, we have no way of knowing, unless our trustees (IGCs and GAAs for contract based plans) tell us.

That would mean looking very closely at all claims on funds made within workplace pensions and establishing whether the “single swinging price” swung as much in favor of  investors as against them.

There isn’t space in this article to go into the rules governing how exit price strategies are applied but suffice it to say it is not consistent and it is very complicated. You can read more about it here. This chart shows you how complex things typically are

The fear is that single swinging pricing can be manipulated by those who are marketing funds, to impress those who govern funds with inflated performance and depress member outcomes where the rules are biased towards the fund manager or simply mis-applied. This is what David Hutchins is talking about when he says that trustees may not be in full possession of the facts needed to judge VFM.

What can be done?

There is a simple way of sorting out these problems and that is to properly disclose not what the fund managers are saying is happening but what member outcomes are telling fiduciaries.

Rather than relying on fancy diagrams and statements of intent, trustees and IGCs need to be looking at member data and seeing if the achieved rates of return for each pot are in line with what savers actually got.

This is the difference between relying on what the DWP call “net performance” (what the trustees are told by the provider) and “achieved performance”, what members got. Achieved performance cannot be manipulated and too often lags “net performance” because of factors that simply aren’t included in the stated charges.

We are lobbying the DWP to abandon “net performance” analysis, which is unlikely to be inclusive and adopt achieved member experienced  “internal rates of return”.

This puts the onus back on the provider to attribute the performance achieved by members and any lag between what members are being told they should be getting.

Performance attribution is likely to be a growing area of analysis, especially when it starts with an examination of member data!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Workplace pensions – what we pay and why we pay it!

  1. Stan Kirk says:

    Henry, I don’t find it at all surprising that a significant portion of fees are devoted to processes which don’t improve fund performance. What about custodianship (i.e. keeping the assets secure) and accounting and auditing to make sure each member actually receives what they are due? None of these are cheap because they involve high degrees of difficulty and responsibility and require considerable expertise and experience.
    In the retail fund world the figure most scrutinised by the client, the adviser and press is the net performance as evidenced by the unit price movement over time (plus income if a distribution fund). This is ironic given the huge effort (without any noticeable effect) by various regulators over several decades to move attention away from performance to charges. So now we also have the fund amc plus an ongoing charge figure (ocf) which includes fund amc plus external charges like custodian, audit etc and now a poor attempt at disclosure of dealing charges which nobody takes any notice off.
    Perhaps the DC pensions world needs to learn some lessons from the non pension retail investment world and consider a “joined-up” approach if the poor consumer (who frequently has both) is not to be even more hopelessly confused than now.

  2. Stan Kirk says:

    Perhaps I should have added that frequently a platform and an adviser are also involved so then the investor gets another disclosure document (at the point of investing) with lots of numbers which include the effect of charges in money over time (all of these charges plus those above except dealing), a fairly horrifying but well buried number and the same number expressed as an annualised reduction in yield (aka return). This RIY number is sometimes referred to in surveys but normally without context, i.e. 0.5% RIY (cheap), 1% (average for 20th century legacy products), 1.5% (average for non advised products), 2%-2.5% (typical advised situation including the likes of SJP) and even up to 3% or more (OMG -call the police).

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