Pension costs and transparency inquiry

The Work and Pensions committee is launching their pension costs and transparency inquiry (link)[1]. According to the committee, they are seeking your views on whether the pensions industry provides sufficient transparency around charges, investment strategy and performance to consumers:

The Inquiry will examine whether enough is being done to ensure individuals:

  • get value for money for their pension savings;

  • understand what they are being charged and why;

  • understand the short- and long-term impact of costs on retirement outcomes;

  • can see how their money is being invested and how their investments are performing;

  • are engaged enough to use information about costs and investments to make informed choices about their pension savings; and

  • get good-value, impartial service from financial advisers.

Eight Questions

I became aware of this latest inquiry from Henry Tapper, founder of the Pensions PlayPen and a director of First Actuarial. The inquiry has asked for submissions to eight questions, which I copy from Henry’s blog (link) [2] with his highlighting:

  1. Do higher-cost providers deliver higher performance, or simply eat into clients’ savings?
  2. Is the government doing enough to ensure that workplace pension savers get value for money?
  3. What is the relative importance of empowering consumers or regulating providers?
  4. How can savers be encouraged to engage with their savings?
  5. How important is investment transparency to savers?
  6. If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?
  7. Are independent governance committees effective in driving value for money?
  8. Do pension customers get value for money from financial advisers?

Paul Lewis weighs in

Paul Lewis (of, among others, Radio 4 Moneybox fame) was quick to offer his pithy answers.

For the most part, I agree with Mr Lewis. Here are my responses to those eight questions.

Do higher-cost providers deliver higher performance, or simply eat into clients’ savings?

They do not deliver higher performance – FACT. The evidence from the FCA is unambiguous: “there is no clear relationship between charges and the gross performance of retail active funds in the UK”. The FCA produced a comprehensive, detailed analysis of this (link)[3]. This is the same for not only individual savers but also for institutional pension schemes investing hundreds of millions or pounds.

Is the government doing enough to ensure that workplace pension savers get value for money?

No, the government isn’t doing enough. The FCA has found time and again that people do not have trust in pensions (link)[4]. It’s not possible to think you are getting value for money if you think you are getting mugged off. In fact, the government isn’t doing enough to help people save full stop. 2% contributions for auto-enrollment will not leave anyone with enough in their nest egg to worry about value for money.

What is the relative importance of empowering consumers or regulating providers?

You can’t put it in the consumers’ hands and expect them to correct deficiencies in the market. The providers have the ability and funds to make life easy for consumers. Besides, this isn’t the right question to be asking. I’m sure readers of this blog are very interested in their finances and investing, but most people aren’t. They don’t want to be empowered, they want someone to make it easy for them so they don’t have to worry about something they’re not interested in.

How can savers be encouraged to engage with their savings?

I echo Mr Lewis: Do savers need to be engaged? Do they want to be engaged? I think the answer to both is: No. It’s better to make saving and investing as painless as possible than to encourage forced and painful engagement.

How important is investment transparency to savers?

Very. Lack of transparency leads to lack of trust. Lack of trust leads to lack of saving. It’s important to remember that opacity comes from somewhere. It is a symptom of a market that is too complex and not focused on consumer outcomes.

If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?

Yes. Both in time and money. But most importantly, in hassle. It can be utterly painful to switch providers and you often have a nerve-wracking wait while your money is being transferred in the ether. These are savers life savings yet time and again providers flout the transfer guidelines. ISA transfers that should take 30 days, can take half a year. This has been a problem for years and the regulators have done little about it. It’s all well and good encouraging savers to shop for the best deals, but if doing so is painful, then savers will not do it. (link)[5] (link)[6]

Are independent governance committees effective in driving value for money?

Somewhat. But IGCs (link)[7] will naturally be focussed on compliance as their number 1 priority. Value for money will always be a distant second. So when there is any ‘doubt’, bureaucracy is followed and improving investors’ outcomes is sidelined.

Do pension customers get value for money from financial advisers?

Rarely. That’s because it’s not cost-effective for most IFAs to offer non-regulated services. It’s these services: planning, asset allocation, behaviours, guidance that are the biggest determinants of financial success or failure. The regulatory regime forces IFAs to focus on products and makes it non-cost effective for the most people to access financial advice (the ‘advice gap’). IFAs need to buy food for their family too (and cover their insurance and compliance costs), we can’t expect them to reduce their prices to a loss or do it for free.

Your thoughts!

You can send your own responses to the committee, and I urge you to do so. (link)[8] The committee opened up responses on its ESA/PIP inquiry and received a flood of submissions that greatly contributed to the committee’s findings.

I would really like to hear your thoughts – please do leave a comment on your responses to some or all the questions.

 

All the best,

Young FI Guy

 

Links:

[1] – https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/news-parliament-2017/pension-costs-17-19/

[2] – https://henrytapper.com/2018/08/05/thinking-the-unthinkable-franks-at-it-again/

[3] – https://www.fca.org.uk/publication/market-studies/ms15-2-3-annex-4.pdf

[4] – https://www.fca.org.uk/publications/market-studies/retirement-outcomes-review

[5] – http://www.thisismoney.co.uk/money/experts/article-6002491/TONY-HETHERINGTON-leaving-investment-service-Smart-idea.html

[6] – https://www.telegraph.co.uk/finance/personalfinance/savings/11512350/Shambolic-Isa-transfer-errors-continue-to-hit-savers.html

[7] – https://www.fca.org.uk/firms/independent-governance-committees

[8] – https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/inquiries/parliament-2017/inquiry11/commons-written-submission-form/

11 thoughts on “Pension costs and transparency inquiry

  1. Lovely summary – I read the same and agree with you. The main thought that I have is that there will be many many people without sufficient pension funds to ever retire. People don’t understand, value or trust pensions and their mistakes now will.lead to Penney in old age.

    1. Thanks GFF. Completely agree. Mrs YFG feels strongly about this. She sees her colleagues ‘saving’ 2pc and expecting to buy a boat at retirement. Something has to change.

  2. My biggest gripe is the nanny state actions when you (attempt) to access your pension and actually get the money sent to your account. There are too many faults to list but if you have a pot of over 30k you are compelled to get financial advice before accessing your own money! IFAs will charge high hundreds to low thousands to offer ZERO value in terms of what is best for you. It’s disgusting and should be stopped immediately.

    If the gov think I need advice when accessing my pension to see what is in my best interest then where was the concern when I was making contributions in my 20s and 30s? Surely it would’ve been more prudent to overpay my mortgage, reduce any debts and enhance my career prospects with additional training etc when young instead of locking away a portion of my wages for 30 plus years with significant risk of future legislative changes?

    Pensions are great if you can afford them and if you want to top up your SIPP etc you go online and tap in your card details and seconds later money disappears from your current account without any interference or barriers. So why when you need to access it does it take so long and involve such interference from HMRC (potential emergency tax deductions that happen all too frequently) , a financial adviser who charges an obscene amount to tell you what you already know and then delays getting the money in your account from your so called provider.

    If it takes seconds to make a contribution it should take seconds to make a withdrawal, it’s my money and if I want to spend it on hookers and ale then that’s my decision!

    1. Hi Tony, thanks for sharing your thoughts. I have a great deal of sympathy with what you have written.

      I understand why the government thinks it’s right for savers to get financial advice for their pension pots. It seems entirely sensible, it’s a big life decision. The problem is, the implementation has been so poor. The FCA guidance to advisers is all over the place. And regulation is still focused on ‘selling’, meaning many advisers can only make a living on transfers, or selling products. There is huge regulatory ‘worry’ about mis-selling. But, the current system isn’t working, the most obvious example being the terrible things that have happened with the British Steel Pension Scheme. The sharks still find gaps in the rules to swim through.

      RDR has significantly improved advice in the UK, but an unintended consequence has been the growing advice gap. For many advisers, it’s not worth it unless the fee is in the high hundreds to low thousands. For many savers, it’s not worth getting advice if it’s that expensive.

      The HMRC emergency tax deduction you mention is inexplicable. I just don’t understand how, some 3.5 years later, HMRC have still not got their act together with drawdown. I suspect that it’s down to a lack of long-term capital investment. The reality is, it’s pretty quick to get your money back (usually within a month, sometimes within a week). But that’s beside the point, we shouldn’t be making it more difficult for savers.

      I do have sympathy with ‘slowing down’ getting money. In general, I’m the kind of guy who likes to take things slow. I think it helps to avoid rash decisions. That said, you rightly point out the inherent contradiction in current practice – it takes seconds to lock money away for 30+ years. Perhaps that is a symptom of a market that is run for providers and not for consumers.

      1. Thanks for the reply,

        I totally agree regarding what IFAs need to charge to cover their regulatory and compliance requirements (I’m a qualified IFA but don’t work in that field any longer) but as you have pointed out in your article, IFAs can add significant value regarding behaviour, strategy and explaining the choices and fees regarding the wide variety of investment options. Financial coaching is the best thing I did while in finance and I helped a lot of people get to grips with how easy it is to invest etc. My problem is that to access a pension you have been paying into for most of your adult life isn’t exactly an out of the blue windfall, we all know that at some point we will want to get the money out that we have been diligently putting in. If we are to be given complete freedom to make our contributions without advice we should be entitled to make our withdrawals without advice after contributing for so long.

        30K is not a large sum when entering retirement years and that amount can only be used to enhance a state pension or provide enough annual income to pay a mobile phone bill if it was converted to an annuity. why the advice threshold is set at 30K is beyond me. We contribute through NI payments while working on the proviso that at some point in the future we will be entitled to a state pension which should bring in roughly £600 pcm. This is paid direct to our accounts without the need for any costly financial advice. If there are no rules for how we receive our state pension, which is worth considerably more than a £30k pot, then how we access our personal pensions should be no different. If my shares held in an ISA make significant gains I can literally press ‘withdraw’ and the entire amount finds its way to my account immediately, no questions asked. ISAs are tax free as we know but 100s of thousands of pounds can be made on shares and there is no requirement to receive advice when we cash out, I believe pensions should be treated the same way. If the advice is purely due to the fact that withdrawals above 25% are subject to tax then by Christ how can it cost £750.00 (minimum charge from most IFAs) to tell someone just that?

        The government and HMRC continue to say that ignorance is not an excuse when it comes to matters of taxes due to HMRC so in my view if an individual wishes to withdraw their entire pension pot on their 55th/57th birthday then a simple solution would be a pop up on the withdrawal screen of the individual’s pension provider that states something along the lines of ‘be advised that withdrawal of your pension may attract a tax liability, we strongly recommend that you seek independent financial advice before making any withdrawals’. Naturally that can be worded better but it’s just a quick example to show what happens in other areas of our adult lives, we are given a clear warning that something may not be in our best interest but there are no barriers to prevent us doing it. ‘Warning, smoking kills’, errrr ok, can I have a pack of 20 please……..Of course sir, here you go……Thank you.

        I enjoyed reading your blog, first time I’ve stumbled across it, keep up the good work!

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