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MM leader: The high price some may pay on charges

Speaking on BBC Radio 4’s Moneybox programme this weekend, ABI director general Otto Thoresen pledged to improve the transparency of total costs faced by pension investors.

This followed a week of negative headlines triggered first by some pretty misleading Labour research and then by a report from David Pitt-Watson warning that certain charges – such as dealing costs and stamp duty – are not being disclosed to investors.

Although there was plenty of hyperbole around the presentation of the statistics in Pitt-Watson’s report, which led to the usual scaremongering headlines, the central issue of investor transparency cannot be ignored.

Costs associated with the underlying investments are by their nature historic and reflected in the performance figures but there is no reason why they should not be disclosed to investors on an annual basis alongside all other costs.

John Kay’s Government-commissioned report into equity markets, published this week, highlights the disclosure of all direct and indirect costs as a major requirement in ensuring trust and creating fiduciary standards between the investor and the industry.

Thought must be given to the presentation of figures to ensure they inform rather than confuse investors. But if presented clearly and succinctly, such information should further empower and educate them about the investment process and lead to a more grown-up debate about the usefulness (or not) of active investing.

Any pension firm looking to cling to the status-quo should be advised that arguments about the value of long-term investing will never be won if there is a perception you are keeping things hidden.

Accompanying increased transparency should be the realisation that a number of investors are in poor-performing, high-charging pensions with significant exit penalties.

Pensions minister Steve Webb says he hopes pension firms will look again at older policies and offer fairer terms to improve the industry’s “battered” reputation.

It will be difficult for the Government to force providers to amend contract terms unless you can prove misselling of the policies, many of which were written pre-2000.

The exit penalties are likely to be very costly for certain providers to rip-up and their shareholders will undoubtedly be unhappy at the size of the bill.

But Webb is right. If the pensions industry wants to end the unfair and simplistic media attacks, the price is likely to be addressing the skeletons in some cupboards around restrictive policy terms. For some, this price is likely to be very high.

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. David Trenner - Intelligent Pensions 26th July 2012 at 8:58 am

    It is easy for politicians to produce soundbites, but let us consider some practicalities:

    1. Closed funds have no incentive to improve public perception. If they abolished capital unit charges this would have no marketing advantage and as Paul says it would cost shareholders money.

    But additionally how fair on those who have already taken the pain and transferred would such a move be? And how long until the first complaint to FOS from one of those who transferred and incurred penalties which, with hindsight could have been avoided?

    Maybe any company abolishing penalties should also reimburse all those penalties applied over the last n years?!

    2. Open funds might have a marketing incentive to abolish penalties, but why should they pay higher transfer values today than they did last week? This is hardly treating earlier transfer customers fairly. And any extra costs could be met by other policyholders: those in with profits!

    3. High initial commissions will have been paid … maybe these should all be clawed back to meet the cost of abolishing exit penalties??

    So, nice soundbite … totally impractical. Sounds like politics to me!

  2. For most this is likely to be too high, largely due of course to the ridiculous levels of commission paid when these poplicies were sold.

    There are of course other issues – the level of MVR attached to with profit poplicies – NPI have one of a staggering 33% mainly because they are committed to covering 4% guaranteed annual returns on some policies secured by long-term bonds which will onky deliver in 0 or 30 years time.

    We end up with the inevaitbale bad publicity about high cost, poor returns and holding policyholders to ransom.

    The reporting may be simplistic but all too often it is also accurate.

    Let’s face it the savings and investment World for most life assurance companies is coming to an end

    Ian Coley
    Partner
    Medical Investment Services

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