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Friday, 20 July 2012

‘I have a dream!’ - Let no man suffer high charges again!

Philip Coggan

Philip Coggan was a Financial Times journalist for more than twenty years and is now the capital markets editor of the Economist. He writes a monthly column for Pensions Insight.

‘Much pension commentary revolves around asset allocation, fund manager selection and the right rate to use to discount liabilities. It is easy to forget the impact that charges can make.'

'So the report from the Royal Society of Arts (Seeing Through British Pensions: How to increase cost transparency in UK pension schemes) is a very welcome reminder of the costs issue. 

The publicity that attaches to such reports may put workers off pension saving altogether.
If the average pension holding is 25 years, then a 1.5% annual charge reduces the final pension pot by 37.5%.

The report gives another example of a man who saves £1,000 a year for 40 years and earns a nominal return of 6% (3% after inflation); before fees, that translates into an inflation-protected pension of £16,080 a year while after a 1.5% annual fee, the income falls to £9,900.

(PM - Wow! No wonder the likes of the Pensions Guru did so well at Prudential, Royal London and don't forget that the Paradigm IFA supplier business boasts of getting its advisers 1% a year in residual commission – well I hope they give stunningly successful advice to justify it!)

The problem is that responsibility for pension provision is shifting from the company to the individual. But the individual is even less aware of the impact of costs than the average finance director (or pension fund trustee). And even when workers try to find out about costs, they may not be able to do so.

The authors of the report (including David Pitt-Watson of Hermes, an industry veteran) asked 23 providers for a full list of charges, including trading costs (which is not included in the total expense ratio); only two admitted that such costs might exist and even those could not provide the details.

The RSA report calls for a much fuller explanation of costs and charges in an annual statement, along the lines of the Danish model. This seems a good idea, although regulators have been experimenting with benefit projections for the past 20 years without having any noticeable effect on consumer attitudes.

Indeed, the publicity that attaches to such reports may put workers off pension saving altogether, hardly the desired result.

This may be another case where paternalism is needed. The Government’s planned auto-enrolment scheme, NEST, has paid a lot of attention to keeping costs down, and quite right too. But employers can help when offering a defined contribution scheme.

Yes, it is important to have the right asset allocation in the default fund and a reasonable selection of single-asset class funds for those who want to do-it-themselves. But none of us know how markets will perform.

However, companies do know that controlling costs will boost retirement incomes and that should be their priority, as the only element that can be reliably controlled.

The US savings market has been revolutionised over the past 40 years by the rise of tracker funds and exchange traded funds, which have lowered the costs for individual savers wanting to invest in equities.

In Britain, many defined benefit schemes have also had success in driving down management fees.

But there is still plenty of work to be done; the average Briton spends more time trying to find a bargain in the January sales than on the more important task of controlling his pension costs.‘

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