Advisers face Mifid II headache over legacy pension charges

Peter Chadborn
Plan Money director Peter Chadborn

Pension charge comparison trust into spotlight

Old-style investment charging models are creating a comparison nightmare when clients wish to move their pensions to cheaper modern plans, advisers claim.

IFAs say it is impossible to give their clients a true picture of the savings they could make by moving their investments to new lower cost funds with Mifid II-compliant pricing, because they cannot compare like with like.

Plan Money director Peter Chadborn says: “Many of the old pension funds still only provide annual management charges and we know that they cost more than newer alternatives, but we can’t quantify how much more because they don’t include the transaction costs.

“When you are carrying out a pension review and you try to calculate the critical yield, it’s a particular problem. You are trying to show the percentage of extra performance that a higher-cost investment would need to produce in order to compensate for the extra fees. If you are looking to move the client from a higher cost option to a lower cost one, this yield should be negative. In this case, it shows how much underperformance the client can tolerate and still be better off than they would be with the higher-cost alternative.”

‘Bizarre at best’: Industry offers mixed reaction as Mifid II comes into force

But Chadborn explains the inconsistency between old and new charging models makes such calculations almost impossible. In the most extreme cases, these anomalies could even turn what should be a negative critical yield into a positive one.

He adds: “I think it’s a treating-customers-fairly issue. We need to look at how we can provide customers with more accurate figures – if the industry won’t act on this, the regulator should.”

Better Retirement retirement director Billy Burrows says: “I definitely agree that there should be more transparency. It’s actually very difficult to compare costs. But while charges are really important, there are other factors. Some older-style pension funds not only have higher costs but can be restricted in investment options available. One of the reasons for high charges is that some old policies include commission. On top of this, many are not pension-freedom ready.”

Page Russell financial planner Tim Page says: “We know those older pensions are charging more than the AMC, but it’s hard to prove, especially now they are not publishing portfolio turnover ratios, which used to enable us to have a stab at working out the extra costs.”

Fool’s gold: How Mifid II has revealed the true cost of funds

Aegon pensions director Steven Cameron agrees that the issue creates a challenge for advisers. He says: “There are times when the Mifid II rules can do more harm than good in combining everything into a single figure.”

But rather than requiring old-style funds to come up with a combined costs figure, Cameron is in favour of newer Mifid-compliant funds also providing a full  breakdown of product and transaction charges so that advisers can make a proper comparison for their clients.

He says: “Aegon does have some older-style pension contracts with older charging models, but we are looking at where we can offer upgrades to our modern platform. However, some individuals with older-style pensions have valuable guarantees that come with those products, so you have to ensure you don’t transfer any clients that might be giving up important benefits.”

Standard approach and better transparency called for

Meanwhile Lloyds Banking Group, which owns Scottish Widows and also runs the legacy plans that were once sold under the Clerical Medical brand, says it has already moved to introduce greater transparency and comparability of fund costs.

A spokeswoman says the bank has used the Mifid template to upload transaction costs for Scottish Widows funds to Financial Express, Morningstar, Silverfinch and Funds Library in order to help advisers to compare costs. The bank says these costs are also available on the Scottish Widows adviser pages of its website, and it is in the process of updating its consumer pages to better signpost these charges.

She adds: “Transaction cost disclosure is in its early days. The basis for disclosure and the interpretation of transaction cost information are immature and continue to evolve. At this stage, the availability and presentation of transaction cost information varies by product as a result of different regulations. We support further consideration of how it can be provided in a more accessible and consistent manner.”

Aberdeen Standard Investments also expressed support for a move towards greater consistency in the way old and new-style product charges are presented. A spokesman says: “There are a number of different methods for calculating costs and we would be happy to work across the industry and with regulators to develop a standard, consistent approach to further improve transparency.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Should the second header read ‘Pension charge comparison thrust into spotlight’ – spell checker can cause problems, but not a smuch as Mifid II.

  2. Comparing pension fund charges has been a nightmare since companies have had to use growth rates more compatible with cautious funds compared to the riskier funds. Sure it is good to show the client an appropriate growth rate but a standard growth rate, as well, would certainly help with comparisons for the customer.

  3. I find that the analysis of old PPP’s (for example) is increasingly challenging as “back books” of DC pensions have been consolidated over the years into companies such as ReAssure and Phoenix Life. I offer no criticism of those businesses and, indeed, have found them to be increasingly helpful of late.

    Most client understand “pounds and pence” better than percentages and it is possible, with a bit of research, to break down old plan charges into an approximate annual fee deduction. This figure is unlikely to be penny perfect, but it is often near enough.

    The odd thing, though, is that many old PPPs that have been running for many years (and I admit that the majority are likely to be “paid-up”) is that they can actually represent very good value for money. For example, in 1992 my firm arranged a PPP for a self-employed individual with what was then Sun Life. The plan has “capital” and “accumulation” units, a policy fee, annual management charges, etc. and on the face of it was looking increasingly uncompetitive. The plan was written to 60 and the policyholder passed that age a year or so ago. That’s when the “loyalty bonus” arrived and this was well-nigh 10% of the fund value. The plan continues and the charges are well below stakeholder levels.

    Old Allied Dunbar plans were often written to age 50 or 55 in my experience and those that have survived have pretty much all gone past selected retirement age. Some of these policies, perhaps the majority, have a charge rebate structure meaning that there are virtually no costs in keeping it going past SRA.

    Sometimes old policy loyalty bonuses are “forgotten”. I recall advising a long-retired teacher who had an FSAVC with Commercial Union. This should have had a bonus just before SRA, but this was not applied until I intervened. I guess no-one ever expected such a plan, that I did not arrange, would survive to SRA!

    You need to look long and hard at PPP from 20-30 years ago.

  4. Lets all be honest here !

    Mifid 2 is not meant for the consumer / client, its just akin to the regulator having a baseball bat now instead of a rounders bat, to beat us into submission and again forcing us to do more work and compliance which in turn makes everything more expensive and complicated for the client

    “Sorry Mr client the only ice cream we sell now is vanilla !”

  5. Replacement business cost comparison has always been very difficult. The bible on the subject is FSA FG 12/16, now over 5 years old but apparently still not followed. There is more than one way of making a cost comparison but the ‘Final Guidance’ is strong on recommending comparison by RIY. So called ‘critical yield’ is another but has it’s own faults. In my experience (approx 15,000 pension plans over a decade), these old plans are often now difficult to beat on cost alone – having been initially heavily front end loaded. Those costs have gone, remaining charges often very low. I’m not sure that MiFID II transaction charges are such a big factor. Firstly, such charges by themselves are useless to the extent of being misleading without a performance attribution study to see whether these charges improved performance (which, after the initial transaction is what they are designed to do). Where such numbers are available on old plans, they are low as many are closet trackers anyway. Legacy providers would make replacement even less suitable, if they were to make those numbers available.

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