The Work and Pensions committee is launching their pension costs and transparency inquiry (link). 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.
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)  with his highlighting:
- Do higher-cost providers deliver higher performance, or simply eat into clients’ savings?
- Is the government doing enough to ensure that workplace pension savers get value for money?
- What is the relative importance of empowering consumers or regulating providers?
- How can savers be encouraged to engage with their savings?
- How important is investment transparency to savers?
- If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?
- Are independent governance committees effective in driving value for money?
- 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.
1 Eat into clients’ savings
3 Regulation every time
4 They should not have to
5 Vital it exists but most savers in practice are indifferent
7 I suspect No
8 Only from a minority
— Paul Lewis (@paullewismoney) August 5, 2018
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). 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). 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) (link)
Are independent governance committees effective in driving value for money?
Somewhat. But IGCs (link) 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.
You can send your own responses to the committee, and I urge you to do so. (link) 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
 – https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/news-parliament-2017/pension-costs-17-19/
 – https://henrytapper.com/2018/08/05/thinking-the-unthinkable-franks-at-it-again/
 – https://www.fca.org.uk/publication/market-studies/ms15-2-3-annex-4.pdf
 – https://www.fca.org.uk/publications/market-studies/retirement-outcomes-review
 – http://www.thisismoney.co.uk/money/experts/article-6002491/TONY-HETHERINGTON-leaving-investment-service-Smart-idea.html
 – https://www.telegraph.co.uk/finance/personalfinance/savings/11512350/Shambolic-Isa-transfer-errors-continue-to-hit-savers.html
 – https://www.fca.org.uk/firms/independent-governance-committees
 – https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/inquiries/parliament-2017/inquiry11/commons-written-submission-form/