Donald Rumsfeld. Photo: Gage Skidmore (Creative Commons)
Pension costs – Inertia rules
One of the challenges in participating in the long-running debate about the level of costs and charges levied on pensions is the risk of getting all Rumsfeldian.
If we do not know what charges and costs are being borne by scheme members and their impact on savers’ standards of living in retirement, it is hard to assess whether they are reasonable or not.
The fear is that we are bringing millions more people into the pensions system thanks to automatic enrolment, only for them to be fleeced by an inefficient, perhaps even rapacious, industry.
A survey of pension providers, it falls a long way short of coming up with a definitive answer to who is being charged what.
But it does illustrate starkly how far the pensions industry has to go before it can claim to have a real understanding of their own business, or to be prepared to give an honest account of it to the outside world.
Take the transaction costs faced by savers who remain invested. Of three master trusts surveyed, one estimated that the costs amounted to 0.01 per cent a year while the other two came up with expenses of 0.5 per cent to one per cent. Either there is a huge gulf in efficiency or someone has done some ropey maths. Transaction costs for those paying into a pension were zero, said some, or up to 0.4 per cent according to others. What looks like a small number on the page will make a large difference to how much someone has to live on in retirement.
Some progress is being made on dealing with the issue. The last government implemented a charge cap of 0.75 per cent for those schemes being used as default options for automatic enrolment – although expenses such as transaction costs were excluded from its scope.
Industry initiatives, such as the energetic Transparency Taskforce, could yet come up with an effective voluntary disclosure regime if the more Neanderthal parts of the sector can be convinced that it is in their interests. The recent defenestration of the relatively progressive Investment Association chief executive Daniel Godfrey was not a good sign.
A study of the asset management sector recently launched by regulators could also shed more light on a key part of the chain.
But progress on dealing with the appalling sums being hoiked out of pre-2001 pensions remains glacial. We should get another update at some point next year.
What the DWP survey did show clearly is that those in schemes not covered by the new charge cap are paying substantially more than their peers. Indeed 70 per cent of savers in these schemes are paying charges higher than the 0.75 per cent cap. In these circumstances the familiar industry bleat that “cost does not equal value” rings very hollow.