As an MP, John McFall was an excellent chairman of the Treasury select committee, regularly putting banks and officials in the firing line. So the pillorying that McFall has endured for his proposal (from his seat in the House of Lords) to cap pension charges at 1.5 per cent a year seems a bit unfair.
Like many serious analysts, McFall has done the numbers. He knows that a 1.5 per cent charge out of a possible 6 per cent return for a cautious fund consumes a quarter or a third of the pension pot. He thinks that is excessive and unreasonable. Do you disagree?
Of course, if you are running an aggressive strategy with your Sipp, you may make returns of 12 per cent a year and not feel too worried about charges at 1.5 per cent. That is not the point. Most people will run relatively cautious strategies with their pension funds that are unlikely to return more than 6 to 7 per cent a year. And advisers will have to recommend such strategies if they are to follow the FSA’s injunction to pay attention to their clients’ capacity for loss.
Just because many low-earning savers will have the opportunity to save in Nest at low charges does not absolve the industry from its responsibility to try to offer value for money. Providers that continue to offer plans at high charges (and, yes, 1.5 per cent a year is a high charge for a long-term pension plan) should be put under pressure. By whom? The FSA? Dream on. McFall does not have a bazooka but at least he has fired an airgun.
The usual suspects whinge that regulators have no right to set or control charges. This is nonsense. Charges are a fundamental feature of saving and investment products. Many other features of these plans are controlled by regulations. Why not charges?
People often make a flawed comparison between control of the rate of charge and control of prices. Yes, controlling the price of petrol or bread is a bad idea – many Third World government finances are in a mess partly because they control these prices or subsidise them or both.
But capping the rate of charge is different from controlling prices. The actual monetary amounts taken from a percentage charge will depend on investment returns. Actual profitability can only be known many years down the road.
Providers are almost certain to use low estimates of returns in deciding whether a given rate of charge will prove profitable, giving them an incentive to set charges too high. And they have all spent years promoting commission-driven churning, with the result that the average duration of long-term contracts has plummeted. Yet they use this shorter duration as justification for even higher charges.
None of this justifies providers’ freedom to set high charges. On the contrary, what it provides is evidence that you need Nest-style arrangements delivering scale and mutuality benefits to deliver value for money.
What I find really objectionable is the attitude that the poor deserve to pay more. The unit trust industry, under the controlled charges regime of the 1970s, delivered investment management to modest savers at a cost less than that paid by millionaires for discretionary investment management and unit trust management companies made good profits. The removal of charge controls has meant higher costs with negligible benefits for investors and much higher profits for managers.
Independent financial advice may be a social service for the rich but there is no reason why financial products should fleece the poor.
Chris Gilchrist is director of Churchill Investments and editor of The IRS Report