The big fight in the pensions arena is now focused on how low a charge cap should go.
In the Blue Corner, is consumer champion Ros Altmann, flanked by the self-styled “pensions monkey” Tom McPhail.
They argue that lowering charges too far and too fast could stifle innovation in the pensions market and lead to “dumbed down” investment strategies. They also claim it also shifts the focus away from annuity reform, which has the potential to deliver far more significant gains for consumers.
Opposing them in the Red Corner is another consumer heavyweight, Mick McAteer, formerly of Which? and now director of The Financial Inclusion Centre.
In an unlikely paring with L&G, he argues that reducing a 0.75 per cent cap on workplace pensions to 0.5 per cent – or lower – is the only guaranteed way of delivering better value pensions to consumers.
McAteer says there is no evidence that higher charging, more complex investment strategies produce higher returns over the longer term. “It’s better to focus on lower charges and better returns, rather than alchemy (sorry innovation).”
The fight is now on to see which argument will hold sway with the Department of Work & Pensions, currently holding a consultation on workplace pension charges.
It strikes me that there are a few wayward punches here, that aren’t always connecting. Altmann points to the DWP’s own figures which show that reducing charges from 0.75 per cent to 0.5 per cent a year, will boost your pension pot by 5 per cent – after 46 years’ of contributions. In contrast those retiring could get up to a third bigger pension if employers were required to help them shop around for the best annuity deal.
These figures certainly have impact. Far more needs to be done to ensure employers, and pension providers, help consumers get the most appropriate product at retirement.
But does this have to be at the expense of lower cost pensions during your working life?
In fact, I am not sure whether these figures don’t undermine the arguments about innovation. Given this small margin of difference, I wonder what “innovations” are possible at a 0.75 per cent charge, that can’t be delivered for 0.5 per cent? Does this simply mean you will not be able to include actively managed funds at the lower fee?
If the lower cap is introduced you may not be able to offer smaller company Japanese funds, “star manager” vehicles, or investments in “alternative” assets within a workplace pension. But are the vast majority of those going into auto-enrollment really going to be worse off as a result? Many would argue that ultra-low charges will force pension providers to concentrate on low-cost passive funds, which is no bad thing.
McPhail argues that getting people engaged with pensions – paying in more, for longer periods of time – will have the biggest impact on overall returns. Again I do not disagree with him. But while you cannot legislate to improve this (aside from compulsory contributions) you can legislate to lower charges. And surely getting people to pay more into cheaper pensions, means even bigger returns.
At the crux of the matter is whether you believe the higher charge will mean a greater range of funds delivering higher returns, and/or thriving businesses that will drive this member engagement. Of course there’s a third option: it just means more profitable pension companies.
Individuals can still invest in “innovative” Enterprise Investment Schemes, property portfolios, the next Neil Woodford – or god forbid – Bitcoins – through a Sipp. But I don’t think this is a suitable strategy for a workplace pension, that will now scoop up the low paid, the unsophisticated and those with little else in the way of long term savings.
Keeping charges as low as possible should to be a priority, alongside targeted help at retirement and better education about pensions. Together these could deliver a knock out punch that would shake-up the next generation’s pension prospects.
Emma Simon is a freelance journalist