Judging by many of the press headlines this week you will have a tough task convincing the general public that pension firms are anything other than scoundrels, swiping hard earned savings with layers of hidden charges. That will be the job of ABI director general Otto Thoresen when he appears on the BBC’s Moneybox programme tomorrow with David Pitt-Watson.
Pitt-Watson’s latest RSA report on pensions, published this week, followed hot on the heels of last week’s unsubstantiated attack on “massive” charges by Labour leader Ed Miliband.
The RSA report is a combination of previous calculations on the magnifying effect of compound annual charges and new findings which suggest pension providers are not disclosing certain charges paid by the investor, such as dealing costs and stamp duty.
As usual with these things there is plenty of hyperbole around the stats. The report suggests that over an average 25-year period a 1.5 per cent charge equates to 37.5 per cent of the pension (the stat most quoted in the press).
The calculation comes from a report the RSA released in 2009 (Tomorrow’s Investor) looking at the effect of a 1.5 per cent annual charge compared to another investor where no charge was taken. The calculations are actually based on a 40-year investing period followed by 20 years of drawdown where a 1.5 per cent charge continues to be taken throughout.
A fairer comparison would probably have looked at the difference had the two pots both annuitised at 65, which significantly reduces the difference, and would have given one of the pots a charge the RSA deems reasonable for average investors- perhaps 0.3-0.5 per cent- and the other a higher charge that requires justification- ie 1.5 per cent.
This would create a much lower percentage which genuinely exposes the extra costs the RSA is looking to highlight and debate, rather than creating headlines such as “half of your pension taken in hidden charges”.
Unfortunately much of the coverage of the RSA report merged two ideas – the effect of compound annual charges and the fact dealing charges are not disclosed- into one: “All charges are hidden and are taking half your pension away”.
It is heartening that Labour appears to be moving away from its scaremongering estimation of charges to where the debate should be heading: does there need to be more transparency regarding all the charges taken from an individual’s pension?
There has been no more talk of the 88 per cent achieving Neptune Mid Cap fund and when we pushed Labour again on last week’s “4 per cent” figures they could only quote a 2009 Government study which found five trust-based schemes (2 per cent) were charging over 4 per cent, with the vast majority under 1 per cent. The study also points out that the majority of scheme charges are paid for by the employer, rather than the employee. Hardly the smoking gun on charges Labour was looking for.
An update to this research, published by the DWP this week suggests the average AMC for trust based schemes is now around 0.71 per cent and 0.95 per cent for contract based pensions. ABI research suggests the average charge for new schemes of 0.52 per cent.
But whilst there is concern that certain charges are being hidden, arguments over costs will be tough for the ABI to win. As Pitt-Watson points out in his latest report, transaction costs associated with investing often add value to the saver. It is not that they should not be there, more that they should be disclosed.
On transparency of dealing costs, the line coming out of a few ABI members is that these are not our charges so why should we be getting stick for not disclosing them? But this misses the point entirely.
The dealing costs associated with buying or selling stock and the resulting stamp duty paid to the Government may not be going to the pension provider but why does this mean it should not be disclosed to the end investor?
IMA research of the All Companies Sector suggests average dealing/transaction costs of 0.31 per cent for active funds, of which two-thirds was accounted for by stamp duty. In tracker funds, transaction costs totalled 0.06 per cent.
Of course such charges are dependent on portfolio turnover and so can only be disclosed historically. But is there a reason why they cannot be disclosed by providers on an annual basis as part of a statement outlining all charges?
You would need to ensure such statements are made as concise as possible. But the argument that people get confused by too much information is normally used by those who are desperate to keep things hidden.
The easy accessibility of information about just about everything on the internet means people are more eager than ever to find out what is happening with their money.
Offering full transparency of charges should educate and empower investors about their savings and allow for sensible debate about the usefulness (or not) of active investing. It will also, hopefully, make them less likely to fall for the nonsense we got from Miliband last week and focus on what matters most- performance net of all charges.
Given the amount of uninformed comment over the last couple of weeks it would be tempting for the ABI to pull up the drawbridge and try and “rise above” the coverage. This would be a huge mistake.
You are never going to stop sensationalist headlines which only focus on part of the story. But you are also never going to win arguments about the value of long-term investing if there is a perception you are hiding things from the public.
Paul McMillan is group editor of Money Marketing- follow him on twitter here