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.”
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.”
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.”