View more on these topics

McFall tells Govt to cap pension charges at stakeholder limits

Lord John McFall’s pensions commission has called on the Government to cap scheme charges at 1.5 per cent as part of wide-ranging proposals aimed at reinvigorating occupational saving.

In its final report the Workplace Retirement Income Commission, led by former Treasury selected committee chairman McFall (pictured), says pension charges need to be capped to ensure people get “good value for money” out of automatic enrolment.

The commission says the cap should match the existing limits for stakeholder pensions, which are 1.5 per cent a year for the first 10 years and one per cent a year thereafter.

McFall says: “There is no point in bringing people into pensions that will erode their savings through high fees.

“The Government should set a clear ceiling on the charges that will be allowed under auto-enrolment.”

Last month pensions minister Steve Webb warned the Government could cap charges if it thinks people are not getting value for money.

Hargreaves Lansdown head of pensions research Tom McPhail says: “The WRIC suggestion that pension charges should be subject to a Government cap is misguided and counter-productive. Charges are the single least important factor in determining pension pay-outs.

“What’s more, a cap on charges is likely to stifle innovation and most importantly it would inhibit member engagement. Stakeholder pensions were a disaster; similarly there has been very little industry appetite for providing CTFs because of the product restrictions.

“A pensions price cap now would risk strangling auto-enrolment at birth.”

McFall also urges policymakers to investigate how the auto-enrolment contribution floor can be increased from 8 per cent post-2017.

The former Labour MP says annuities are “sorely in need of a shake-up” and calls on the industry to develop more flexible products.

He says “serious consideration” should be given to requiring schemes and providers to direct members and consumers to an annuity comparison website as part of proposals to increase shopping around at retirement.

In addition, McFall calls for a permanent, independent pensions commission to be established to “take the politics out of pensions”.

He says: “Pensions are a long-term issue and the public is tired of short-term tinkering.

“We need a permanent, independent commission to take the politics out of pensions and restore some faith in the future.”

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 23 comments at the moment, we would love to hear your opinion too.

  1. Another privileged twit who thinks financial products sell themselves as if they are viewed as a necessity of life, like food and water.

    Financial products are not looked upon like that, by the vast majority of the public who would rather spend their money on enjoying themselves now. The public need to be prodded and cajoled into making provision for their future and advisers can’t do that if they don’t get paid for it.

  2. I distinctly remember the tsunami of new clients beating at my door to buy a pension when Stakeholder pensions were introduced with a charge cap of 1% – I could hardly cope! What a naive, foolish statement and what a total waste of taxpayers’ money to fund a Commission that was obviously given a political steer up front to avoid the only obvious answer of compulsion. We have a retirement funding crisis which is entirely the fault of successive governments all lacking the guts to do the right thing. As charges have come down so have savings rates as a percentage of earnings – how does that sit with the Commission’s findings?

  3. It is annuity rates which are the poor deal for pensions. We have gone through a period where annuity rates have fallen faster than people can save. Now some of those good old S226 pensions with guaranteed annuity rates are looking extremely welcome with rates of 8 – 12%, furthermore they paid quite substantial commission at the time as well.

    The problem with pensions is that if an individual cannot see themselves creating a pension of say £12,000 per annum, then they fail to see the reason to create one of £5,000 per annum hence they do nothing.

    Secondly the government has created a culture of where the public think that the State will take care of them. Why create a pension of £20 per week and then get no financial support because you have saved.

    As incorrect as it may be, that is the perception.

    Finally, anyone encouraging someone to take a pension needs payment for doing such. Many advisors will have clients who paid £50/£100 per month into a pension and now are paying £1,000s having got the saving habit. Once employees now directors of companys who are prepared to commit monies for their employees.

    Without due reward nothing will change!

  4. David Parkinson 1st August 2011 at 9:58 am

    I have read numerous reports/commentaries/blog comments on the lack of regular savings and pension contributions that the great unwashed are making these days.

    In my view there is one thread running through all of this and it is that no adviser in 2011 (tied or independent) can market this stuff to clients as the aint no money in it. Simples!

  5. McFall best talent is self promotion. he was on the TSC when it let the FSA et al destroy a dozen or so banks. He is not competent to run a whelk stall.

    For the uneducated (like McF) price controls – which is what this is – never ever work. They always result in unintended consequences of one sort or another or they simply destroy the manufacture and distribution of any product or service to which they are applied. (Thinks. I wonder if that applies to prostitution?).

  6. I sympathise with the frustrated posts thus far.
    When will it finally sink in to those cerebrally challenged occupants at Westminster:
    1. Making pensions compulsory is regarded as a tax.
    2. That enforcing constraints on commercial entities isn’t going to get you anywhere. Any IFA can tell you that whenever you discuss a stakeholder contract with current providers the first thing that happens is that they try and persuade you to recommend one of their other products which are ‘much better’.
    3. In the end if our rulers are ever to really understand and achieve a better pension for all they will realise that this has to be funded by the State and paid for via taxation. If the State wants to ensure that their citizens have a decent pension in retirement then it is their responsibility to provide it – not pass the buck. Let those who wish to engage and improve their retirement do so – with every incentive. If you don’t then those with a decent retirement income – for which they have made the effort – will simply emigrate and leave you with those that will be a burden.
    So please save the money of all these useless initiatives, reports, Quangos and holier than thou prognostications and get on with it.
    How the report can say in one part that people made better provision in days gone by and then criticise the current private pension system is beyond me.
    Does the Noble Lord really think that initial units, high charging, very limited contribution limits, limited funds, high pressure sales , companies forming and disappearing on a monthly basis and a very narrow choice of schemes was so much better in days gone by?

  7. The annuities system is an absolute horrorshow.

    Pensions communications are impossible to understand.

    Why should Joe Soap / Mr Average lock his pension into the vagaries of the stockmarket? This risk downside is shocking.

    The whole DC pension architecture needs a real shake-up. Seems to me the ‘industry’ is doing very nicely out of it.

    At least McFall is giving it a go.

  8. Terence P.O'Halloran 1st August 2011 at 11:30 am

    And the qualifications for Mr McFall; icon of the pensions industry?

    None.

    Similar then to the two chancellors (or is that chancers) that got the pensions industry into the mess it is in (along with the county’s finances).

    How do these people gain such status?

    An insider dealing investigation into Gordon Brown and Robert Peston might not go amiss and John McFall as a technical witness would put the icing on the cake.

    Stakeholder failed – the industry and the public; it was born of politics and promoted by novices. Now another ‘novice’ is telling us how to do our job!

  9. Nicely put Harry. Time this ex-school teacher, ex-MP McFall (hard to imagine that anyone in the country has got a better pension deal than this bloke?) shut up about matters that he has made sure he is totally unaffected by.

    I’m afraid I have absolutely no time for those who force others to carry burdens they are not prepared to carry themselves. i.e., politicans like McFall making sure their own pension provision is under-written by the tax-payer while plundering private pensions to fritter away on public-sector non-jobs and other hare-brained schemes.

  10. I see Caroline says time this ex-school teacher ex-MP Mcfall shut up about matters that he has made sure he is totally unaffected by.Who should represent UK pension investors interests,certainly nobody from the pension’s industry.After all we would not want a conflict of interest.I have been following this website for some considerable time now and I have never seen as many insulting comments if anyone from outside your industry dares to challenge it.UK pension charges are some of the highest in the world.If the Dutch and Danish can run a scheme with only a 0.25% Annual Management Charge why can’t the UK.I await the usual insulting replies.

  11. @ Lesley

    Well said !

    However I must say the comments are largely from people with industry knowledge who know what they are talking about.

    I see where you are coming from but its like you telling a surgeon the best way to perform bunion surgery is to go through the brain !! is it not best to let the surgeon figure out the best route to take ?

    We rarely see anyone asking us about our thoughts ?

  12. Lesley, Insulting replies are unwarranted and unnecessary. It would be welcome however, if you were to state your interest in this topic as you are “outside” of the industry. The problem and subsequent frustration felt by many respondees is simply that they know that charges are a very convenient red herring used by people that either don’t want to or are incapable of understanding the real issues. Charges should be high on the agenda when we have a thriving, demand led pensions industry but first we have to convince or compel people to save for themselves. Imagine for a moment that pension charges ceased to exist and they were charge cost free – do you seriously think the private sector employees without provision would suddenly rush to the nearest pension shop and buy one – of course not. Please have the courage to be honest about the real issue as that will help rather than hinder the debate.

  13. I would refer everyone to the article by Simon Kuper in the FT Weekend Magazine 30 July 2011 in which he quotes Frank Field.
    1. Most journalists don’t know the history of the their field – now we can extend that statement to politicians.
    2. Most schemes have been tried before – if it’s not law now its because it failed. e.g Stakeholder Pensions (despite FSA pressure).
    Lord “Blether” McFall really should give the pretence of thinking before opening mouth. Most people do not pay any charges on their pension schemes – they don’t have one.
    But what of those that do have a pension policy
    Since the FOS took full responsibility of financial service claims there have been in excess of 1m substantive complaints across the total financial services market (one would expect it to be more based on the cried of doom that each report elicits). Of these less than 20,000 (2%) related to Personal Pensions. I doubt that all these related to costs, but even it they did it is not a high number in relation to complaints – 2,000 a year.
    According the FT 840,000 personal pension policies were bought in the period April 2009 to May 2010 – obviously a poor take up. That could indicate that in excess of 8m policies were bought in the last 10 years. So personal pension complaints are running at around 0.25% of total volume – and we know that only a proportion of those would relate to costs.
    The above figures do not suggest that costs are a major factor in the alleged dissatisfaction with pension policies.
    Perhaps any perceived reluctance to purchase lies in a different direction.
    One area that should be researched is the “give a dog a bad name” syndrome. If everyone down your street keeps saying that Joe Bloggs is a nasty person there is high probability that you will believe them, whatever the evidence or lack of it. Pensions are high on the list of everyone who wants to get media headlines, e.g. Lord McFall, Consumer Focus, FSA, and it is never complementary. So why, in that environment, should anyone in their right minds want to take out a pension policy – a “proven” disaster.
    Sociology and Social Psychology have demonstrated the power of peer pressure time and again. Some institutions have used this proven knowledge to increase compliance to selected norms. So for example, if Lord McFall had stated that 80% of the working population (I have no idea if the figure is even realistic let alone accurate) had purchased/owned personal pensions current evidence indicates that there is a greater likelihood that more people would take out pensions – because it was the thing to do. Constant carping is more likely to have the opposite effect.
    As we all know pensions, and other financial products, have to be sold because there is so much negative sentiment about them. Yet the figures laid out above indicate that 99.75% of personal pension policies purchasers are reasonably happy with their product. Is that not a more powerful message?
    Yet there will always be a segment that will not contribute to a pension scheme, because they cannot both contribute and have food on the table. Lord McFall’s statement must both irritate and humiliate such people.
    Sometimes people become so involved in their sphere of influence that they fail to understand that there is another, very much bigger world out there. And there are a range of perfectly valid options and solutions to any scenario other than State Enforcement.
    Costs may be a factor, but they are not the reason, for perceived low take up in personal pensions. Costs did come down after the introduction of Stakeholder pensions. If they are to reduce further on standard contracts two factors need to be addressed. Firstly, most providers indicated that it would take years to break even on Stakeholder pensions, so one assumes they must require other profit sources to maintain current viability. Secondly, were is the competition that would drive prices down. I struggle to name 18 insurance companies that can provide pensions; there were in excess of 180 when I first started, and there was still well in excess of 100 when regulation was introduced. Is the cure worse than the illness?

  14. Another John (not a Lord) 1st August 2011 at 2:49 pm

    I note that Sir neglected to mention the biggest drain on personal pensions – Gordy’s stealth tax! Something the Government can do something about.

  15. Dear Lesley

    In the politest way possible I would tender the following points:

    1. Those that rail against pensions are generally those who haven’t got one.
    2. I have numerous clients with funds over £500k. Against cost price (even on a gross – before tax relief basis) they are doing very nicely thank you. When you then consider the tax relief – the figures are unbeatable.
    3. Many of us awful IFAs also put our money where our mouths are. My wife and I both have reasonable pensions funds, built up over time.
    4. I do agree that some of the older plans (and some of the current ones) have charges that are rather too high, but that is exactly why you need a good IFA – to help steer you to where the best deals are. But remember it isn’t only the cost it’s the value. I am well able to access the very cheapest plans but I choose not to (for my own pension) as there are other things I vale more – unfettered access to the largest number of funds being just one example.
    I do agree that anything provided by a traditional life office is suspect. When I started in Financial Services I was amazed at the nefarious practices and the appalling way these large companies were run – 20 odd years later I haven’t changed my mind. But there are other options. You just need an IFA to show you the way. (And make sure it IS an IFA – independent – not restricted or some other manifestation).

  16. Dear Lesley

    PS

    As to being rude to Parliamentarians – the difficulty here is not being able to be rude enough. This is by no means confined to Financial Services, in any industry and in any walk of life the antipathy to these 650 odd is rampant. And why should that surprise you? Apart from the expenses scandal – from which they STILL have not emerged with any fragrance you would be hard pushed to find a more deceitful, self-seeking and generally incompetent bunch of people at their salary levels.

  17. Another half-baked idea from someone who obviously knows not a lot. Lord McF, it’s better to remain silent and be thought a fool, than to speak and leave no room for doubt.

    Why not get rid of management charges altogether, then customers can have something for nothing and we can all retire? Only problem there is no-one will buy them.

    I don’t have a problem with management charges, as long as they can be justified. e.g. when bid/offer spread was commonly 5%, a certain Stewardship Fund from a mutual charged 6% – and that fund out-performed most of the others charging less! QED!

  18. Glen McKeown writes “99.75% of personal pension policies purchasers are reasonably happy with their product”. If that is the case there would be nothing to fear from an amnesty. Let all those people who are unhappy with their personal pensions, who feel completely conned by an immoral system, get their money back (less tax), back into their own control!

  19. Stakeholder charges at 1.5% AMC… wow..

    I remember those good old days when all those highly qualified actuaries stated that they could run Stakeholder schemes at 1% AMC, make money for the provider and pay the introducer IFA bod 90% LAUTRO..

    So …’scuse…. but at 1.5% p.a. just where is all the money going when no commissions become payable…??…

    Good value for money….??

  20. I pay a 2.3% pa fund management charge on my personal pension. However the average growth i have seen recently is 20% pa.

    If i my company had to reduce its charges down to 1% pa and i saw my returns come down to, say, 10% pa i wouldn’t be happy.

    As for other european countries they are not encumbered with a horrendous set of annual fees and difficult tax laws. Companies here can look forward to monumental charges for:
    – The FSA
    – The FOS
    – FSCS

    all on an ANNUAL basis i might add before they even start to consider compliance issues (costs) arising out of FSA/ HMRC regulation changes and normal business expenses. These are all UK specific issues.

  21. Lesley has attracted some opprobrium, I see. She has complained that the industry always moans about the politicians, and suggests that a lot of private pension charges are higher than they need to be.

    I think both her complaints have heft. But the McFall charges recipe (Stakeholder) has already been dumped by NEST in favour of something cheaper. Has anyone told the noble Lord? The stakeholder structure was plain silly.

    Despite all the huffing and puffing, it remains the case that our charges are, in general, higher than a truly competitive market might secure.

    If you buy a fund on a platform, the fund manager charges 1.5% because the platform and the adviser both want a cut.

    The costs of distribution of our financial services products probably exceed the value added by that distribution by a significant margin.

    One part of the answer is to insist that ALL charges are disclosed to the customer in cash. I have tried to persuade all kinds of people about this, and failed miserably.

    Half of one per cent sounds a bargain. It ain’t.

  22. We have had hard commission disclosure for some 20 years. or have I misunderstood?

Leave a comment