There is much to commend in the DWP’s belated focus on charges and commissions in workplace DC pensions. But when it comes to the charges hidden within funds held in pensions, it appears to be ducking the issue altogether.
We need a root-and-branch review of hidden annual management charges – as proposed by Labour last week and promptly rejected by pensions minister Steve Webb and the coalition.
Ironically, on the day Labour’s amendment was rejected, FCA chief executive Martin Wheatley was speaking about £500m a year of investors’ cash spent off balance sheet – that is, outside the AMC – on corporate access.
I do not wish to belittle the DWP’s genuine efforts to improve member outcomes by targeting pension provider charges. But for us not to know what fund managers are charging on the funds held within pension schemes makes a mockery of the very concept of a charge cap.
There are various hidden costs: bundled commissions, or soft dollars, which Wheatley last week flagged up as an area in need of major reform; but also stock lending, interest on cash, spreads and foreign exchange rates within fund managers.
Fund managers have a right to make money but where millions of apathetic consumers are being nudged into their products without a wet signature, we at least need to know what is being charged. When overseas equities are moved from one fund to another in a different currency, we need to know if the exchange rate is any better than you would get at an airport.
The DWP consultation skates over these issues, simply saying maybe we do not want to disclose them to members because it may put them off. The serious point is that we do not have anything to disclose to them because nobody, except the fund managers themselves, knows what these charges are.
At last month’s Corporate Adviser Summit, Dr Christopher Sier of Stonefish Consulting set out a range of hidden costs in local government pension schemes which he had managed to uncover only because they were public documents.
Many key figures in DC pension consultancy largely agreed with his view that the pensions industry is having the wool pulled over its eyes by the fund management industry. Nest chief investment officer Mark Fawcett admitted he did not know Nest’s process for Forex scrutiny – which is no particular discredit to him, not just because he only has £30m of largely UK-based assets under him at present – and neither did virtually anyone else present.
Corporate Adviser will be publishing guidelines from Nest and Stonefish Consulting on how to quiz fund managers about their under-the-service charges later this week.
These hidden charges are no longer unknown unknowns, as Donald Rumsfeld would have it – they are known unknowns. Unless they become known knowns, accusations of hidden charges will continue to plague pensions as auto-enrolment proceeds.
John Greenwood is editor of Corporate Adviser