My Response to The Pension Costs and Transparency Enquiry

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

Response to the
Pension Costs And Transparency Inquiry.

About me.
Richard Smith is the explainer in chief over at www.MoneyTrainers.co.uk and the resident specialist over at www.thefinancezone.co.uk you can contact him directly on 0774 007 6226 or via the website(s). Qualifications from the Chartered Insurance Institute and the Institute of Financial Services.

Summary
Pension providers are in a unique position in the UK.
The public perception is that Pension contracts are complicated with a number of moving parts, reality is, defined contribution pensions – personal pensions and the income options at retirement are expensive and complicated. Many consumers are forced to pay for advice that is often not up to standard.
Despite years of regulation, since 1988. The same topics keep arising, mis-selling is still going on, poor investment returns are a constant topic and product charges are a real problem.
If you are in your forties now, you can expect today’s millennials to be at the peak of their careers when you draw your pension. Many of these will not want to be making contributions to a scheme that they are unlikely to benefit from.

There is little evidence to show that higher charging pension providers deliver higher performance. Many providers still don’t produce adequate levels of administration and nor are the comparison tools available.

Every change in Government involves a tweak to to pension policy or arrangements, with the main focus on ‘kicking the can down the road’ – there are serious problems with pension provision in the UK and no Government in the last thirty years has wanted to deal with the problems.
As an introduction I have included for you some of my comments from the Great British Pension Swindle along with placing a link to the full version in the appendix. A copy of this which has been sent to Messrs Hammond, Opperman and Corbyn and I have included the responses from their respective offices.
Do higher-cost providers deliver higher performance, or simply eat into clients’ savings?
There is no evidence to support that higher charging providers deliver more in the way of better performance or investment returns. Before considering this furter I feel an explanation of charges is required.
An Explanation Of Charges
A 1% charge equals ten percent of a pension fund every ten years. 2% charge equals twenty percent every ten years.
Pension contract terms run from 18 ‘til death, dependent on the options selected. This means the provider has access to the income via charges for 61 years based on present average (male) life expectancy and assuming some kind of pension freedom contract is considered into retirement.
Charges are never expressed honestly, like they could be below.
“Dear Bob, good news about your pension. So far you’ve paid in x, we’ve charged you y, and because we are so great at managing your money your pension fund is worth £zz.zzp”
There are also further questions that arise.
Why there is little comparison information available.
Why can’t I find out who has the lowest charges?
Who has the best overall returns?
Who answers the phone fastest?
Who charges a penalty for early retirement?

The reason the industry doesn’t want to publish the information – it thinks consumers are too stupid to understand and will end up buying on price – not so.
Having access to information is not advice, advice is going to your GP and after an initial consultation you are are advised you are dying and need urgent medical help. You can’t find that out by looking it up on NHS.net, but you could get access to a review about your GP, or information on the prescribed drug. Just not a pension

A business that sells pensions is in a unique position. They have access to OPM – other people’s money and levy a series of charges over a long period of time.
It’s for that reason pensions are attractive products for businesses to sell.
Remember in addition to the fund fee there is a provider fee and adviser fee (both for normal pension and income drawdown products) these fees could be
Adviser fee .50% per annum
Fund fee 1.60%
Provider Fee .50%
Total charge of 2.60% per annum or 26% of the fund every ten years effectively wiping out any effect of tax relief.
Charges are not clearly shown within pension statements. It should be possible to to explain to a consumer… that under this contract your charges will be 1% fund charge, .50% pension manager charge and .5% adviser charge.
This totals an annual charge of 2%. If you have £72.000 invested, which is the average UK pension fund then the total costs of running your pension will be £1440 every year or £120 per month.

The concern is, that many people wouldn’t invest in pensions if they understood the true cost of them – and that’s a massive problem, it’s also one reason they are not considered as a primary investment for the working classes, but are of course used by the wealthy as a tax planning tool.

Pop over to any of them and search for ‘charges’ or ‘pension charges’, there are few results and most certainly nothing there for you to use.

Providers tend to obfuscate costs and charges.
Since financial regulation in 1988 there have been various attempts at disclosure of charges and these have always been decided by the product providers. Financial regulators give guidelines and these are then interpreted by the advisers/provider.
This has not benefited the consumer. Yet with loan and mortgage contracts the regulations have been prescriptive and advised consumers exactly what these charges are.
So instead of using terms like RIY – reduction in yield or by ‘cost comparisons based on projected returns’ why not state the true cost in pound terms. This would then enable consumers to compare on a like for like basis.
Examples of pension charges if you pension fund is worth £500,000

Or

Average UK Pension fund (source PensionBee) is £71342

Advisers are not clear about their initial charges or ongoing costs, sure there are some initial disclosure documents but the information tends to be buried in multi page documents, and normally within not on the front page or rear page.

Let’s look at how one provider does it. A simple search on Aviva – UK for ‘pension charges’ shows

The answers to the question are on one page. https://www.aviva.co.uk/retirement/pensions/aviva-pension/
However that is not the full story. In order to work out what the charges are on your pension you’ll need to do some digging.
What fund are you invested in? Each fund has a different level of charges.
What pension contract do you have? Aviva will have hundreds of different contracts each one with a different charging structure.
Obfuscation is everywhere.
Pension Providers Are A Business
Providers are businesses and are run with the sole objective of making a profit and will therefore charge the maximum they possibly can and despite the massive increase in the number of providers there is no evidence of true competition in the sector in that the costs of pension products have remained very consistent over the years, and there are no new firms coming into the market with different offers, just more of the same.

The cost of providing the pension wrapper should be very little, there is virtually no reporting (annual statements) and limited administration.
The levels of service from many providers has been slipping in recent years. – not helped by consolidation, businesses like Phoenix Life have taken over more than one hundred and forty seperate life assurance and pension providers in recent years.
Despite reviews and enquiries about pension charges various regulators, including the Financial Conduct Authority and the Association of British Insurers little has happened.
Five years after the OFT review, four years after the ABI review the FCA has decided to review pension charges and outcomes.
Non performance, high charges (that have contractual obligations that apply) and a difficulty in getting pension funds moved from one provider to another make them lucrative products for providers and awkward investments for consumers.

Investment Funds – important because this allows providers to further complicate the matter of pensions
Many pension funds have investment returns that can only be described as lacklustre, the underlying investments allow providers to further complicate matters and increase the overall level of charges.
With no downsides for non performance in relation to investments – there is little chance a complaint will be upheld over poor investment returns, and many pension funds don’t outperform the market over the long term.

Let’s Consider Pension Fund Performance Generally.
Morningstar.co.uk – a leading fund information provider show that there are a large number of pensions funds available.

Of these funds there are 680 that get a five star rating, just four and a half percent (4.51%) of all UK pension funds are rated as the very best.
Excellent fund performance tends to come from specialist areas, most consumers will only have a small part of their overall funds invested in these specialist funds.

The key to all of this as a consumer, how do you work out what to invest in when you have a range of different investment returns and 15000 odd choices. Advisers are only guessing and consumers are doing even worse than that.

Thousand of pension funds underperform, for which there is no basis for complaint or any protection against non performance. Perhaps the only consumer product where there is no comeback for being useless, moreover chances are you won’t find out how crap the investment is until a lot closer to death.
Another reason why pension statements should show. “Dear Bob, good news about your pension. So far you’ve paid in x, we’ve charged you y, and because we are so great at managing your money your pension fund is worth £zz.zzp” perhaps this could add in ‘which is an increase of £xx in the last twelve months’.
At the date this feedback was compiled there are 2176 shares listed on the UK (LSE) stock exchanges. Worldwide there are more opinions (fund managers) than shares to invest

Organisations like Money Advice Service and Pensions Advisory Service do not provide sufficient information in order for consumers to be able to make an information decision on charges.
Pension providers do not seem to behave like they are in a competitive market, no matter how many providers enter a market there is little different on offer.

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

It would be easy to respond to this and say no, however the bigger problems seems to be in working out what is value for money.
Auto – Enrolment (AE) – no more than a gift to the industry. These newer style plans have started to replace personal style pensions and are the new standard for company pension plans. They are also mandatory for those earning over a certain amount, your employer is also forced to make contributions to the scheme on your behalf.

For many lower paid, multiple job workers they miss out on employer contributions and also tax relief which makes a completely mockery of the legislation – enforced savings.

Government is really saying, sure we want everybody to have a pension but not those working on a limited number of hours.

NEST is the Government’s flagship AE scheme that was set up via a loan from Taxpayers and in conjunction with TATA Many employers use this scheme as a default option. At the moment is is some £400m in the red (latest accounts) and it’s only source of income is charges deducted from members funds.

Again it seems that a Government created provider is no better than a private company at this whole pension thing – problem is, as a taxpayer investing in a NEST pension you pay twice, once in charges for your own fund and secondly for the taxpayer subsidy it’s getting.

Further, TATA the specialised consultancy had agreed a £600m fee over the first ten years to cover the I.T within NEST (£60m per year buys a lot of I.T) given that TATA have been a supplier of I.T to the pensions industry for many years it would appear to be ‘money for old rope’ as they say outside of Government circles. As they had already developed the software required.

If you consider the situation with NEST, the organisation set up with taxpayer funding has continually failed to deliver, it has recently borrowed more money in order to cover its costs. These costs are borne by the policyholders, many of which have no individual choice under Auto Enrolment rules – mandatory pension contributions, deducted from gross pay.
Once a member works out that a) fund performance is poor or b) charges could have been lower with a different provider or c) NEST decides that it needs longer to set up and borrows yet more money and the members need to pay higher charges for a longer period – there is nothing the member can do. Save opt out and lose the employer contribution.
Forcing a consumer to pay for something and then not casting into statute a set of rules forcing the product to be better than best is not fair.
Someone making payments to a NEST AE scheme could also have credit card debt or personal loans in place. Credit card interest rates could be as high as 29% per annum and personal loans could be as high as 10% per annum in interest charges. Government should be doing it’s best to inform and educate these people that putting money into a pension, instead of reducing debt could be doing them great financial harm in the short term.
Interestingly enough, the fund manager for NEST – State Street was expecting the funds under management within NEST to be in the region of £100bn and £200bn in total
Based on these figures, and, the fact that average charges for NEST are .50% per annum, there will be at least £500m of gross profit available per year at some stage in the future. It’s good news for State Street, TATA and NEST – but as the figures are not published we can’t tell.
Let me ask you this question. How would you like a business that makes half a billion a year, with profits tied in for fifty or sixty years of more and fully supported by law?
Government is being naive over NEST and Auto Enrolment more generally.

What is the relative importance of empowering consumers or regulating providers?
Consumers need to be fully aware of their options. If we continue to use taxpayer funds to subside an industry via pension tax relief I think they should be made fully aware of their options and a full explanation of the pros and cons of pensions.
Importantly, risk warnings about the importance of reviews, charges and investment performance along with the implications of investing in pension versus repaying short term debt.
Empowering consumers is the most important issue here, no more regulation for providers but more information and workshops held.
Simple and timely information should be provided and impartial information given.
NEST is soon going to have profits of half a billion – it can afford to run these. If pension tax relief is ended there will be a further £50b (odd) available. If we make Google and Amazon et al pay their may be a bit more to go around – sorry off topic.

4. How can savers be encouraged to engage with their savings?
Not so long ago there was an army of people offering local advice in the home. The home service providers, The Pearl, Pru, Liverpool Victoria etc. Offered low cost guidance and a range of savings and investment products.
Sure, you could say that these products were expensive or that the distribution costs were prohibitive. Yet, there was a class of citizen that could access a trusted adviser – every month as they called at the house. Sure, it seems an outmoded form of advice, but plenty of people benefited from this kind of service.
We also had milk delivered in reusable containers, and meat wrapped in paper, took our own bags to the greengrocer – some things look dangerously outmoded, but actually were the right model. We didn’t need recycling then.
There is no reason why a number of online portals can’t be created with some simple ‘do this get this’ examples. But, with further input from specialists. Sure the advice industry is going to hate it, but they hate anything that may take bread of their table, to alter the status quo.

There is a distinct lack of information around. Money is perceived to be boring or difficult – it’s not properly taught in schools and there is limited information available from the Government/Industry supported portals – where it does exist, there are few positives.

There is not sufficient information showing/helping people become financially independent, just plenty of negative stories for when the proverbial is hitting the fan.
Organisations like MoneyAdvice are not proactive enough in their approach to make sure that everyone considers their personal financial situation.
There are no charge calculators or guide.
There are no risk profile/asset allocation tool.
The two things that decide how good or bad an investment is are, charges and asset allocation, little mention of this on Money Advice and certainly no practical help.
Advice on AE if you have debt’s needs to be better structured on Money Advice, but at least it’s mentioned.

How Can Poor People Save?
This conundrum has been considered carefully by Government after Government – and so far they have all missed the point.
Poor people can’t save because they are poor.
Those just over the breadline are struggling because of low paid work, zero hours contracts and a constantly changing benefits system, oh and then there is the housing issues.
If you have a have a healthy and wealthy working population with money spare at the end of the week or month – they’d save, no problems.
Enforced savings via Auto Enrolment should be replaced with an adequately funded state pension – see The Great British Pension Swindle in the appendix.
Money Education
All Government portals should be focused on a financial education.

5.How important is investment transparency to savers?
It is vitally important.
The industry, both provider and adviser do their utmost to make sure that specific charges are hard to work out, they complicate fund choice by using Mirror Funds with no meaningful explanation and don’t offer information in a straight forward enough way.

6. If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?
Of course they are. The one thing that providers hide behind and are fully supported by the regulator is the issue of barriers.
Government even helps by making advice mandatory in some instances.
There are no
Advice
Understanding the terms
No comparison of charges available
Simple table of charges laid out in an identical way from each provider

7.Are Independent Governance Committees effective in driving value for money?
This is not a complicated thing to we have a number of financial regulators who should be working to make sure that the industry they regulate does the right thing for the customer.
If the advice industry and the providers adopted the stance of a fiduciary there would no need for regulation or independent committees.
From Wikipedia
A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. — Lord Millett, Bristol and West Building Society v Mothew

8. Do pension customers get value for money from financial advisers?
Despite being heavily subsidised the advisory industry, along with the fund management and pension industry continues to charge considerably more than necessary.
Less than ninety four percent (94%) of UK consumers take advice.
Advisers are not interested in working with people that can’t service their businesses long term. The advice industry is like a ‘heroin addict’ desperate for it’s morning fix, but then makes sure that once it’s had it – the abusive relationship with it’s income source continues – ongoing advice fees allows it’s desperate habit to continue.

Fees
There is no other professional service in the UK that would be allowed to operate like financial advice practices.
If adviser fees are deducted from the investment funds then no VAT is charged on this fee which does seem like a heavily tilted market for advice.
Based on some industry figures it seems that around six percent of the population use the services of a financial adviser, with ninety four percent not using them at all. It does seem a little unfair that there is a VAT charge on tampons, but not on financial advice, all because of an historic arrangement in relation to commissions.

This unequal treatment robs the taxpayer of the VAT.
Financial advice and product arrangement are clearly a service and should have VAT levied in the amount charged. Every other professional service provider works on this basis.
There would be questions asked if Accountants, Solicitors and Estate Agents could avoid VAT by the use of a different form of contract.
Contingent Charges
Since the commision ban came into force some years ago, advisers have been able to opt to have the fees charged for advice and product arrangement paid by the provider, taken from the amount of money invested or transferred.
This has made it very easy for advisers:
To get paid
To hide the true cost of advice
To benefit from no VAT on services (advice)
Commision has been replaced by a disclosed fee that is not paid paid by the client, but paid by the product provider – so much like a commision, but not.
Importantly, the level of fee charged is often disproportionate to the work done.
If we consider Final Salary Pension Transfers, where it is a legal requirement that members get advice if the transfer value is over £30,000.
Government decided that it should force consumers to take advice, which on the face of it seems fair. However it forgot to ensure that the costs of advice were also legislated for.
Now we see the costs of advice running from £2500 – £10,000 depending the size of the fund, advisers are leaning on the fact that ‘because members don’t have to write a cheque for the costs of advice’ – in that it’s taken from the final transfer figure – advisers can charge more.
At the same time we’ve seen the quality of that advice – which is mandatory called into question – I’ll be honest the results ain’t that great.

Given that the time taken to process and advise on a such a transfer is the same for a £30,000 pension pot and a £1,000,000 pot it doesn’t make sense to have charging schemes on a percentage of fund basis.
One option here would be make advisers charge a set number of hours – let’s say four hours and then prepare an actuarial assessment of the advice and the options for transfer. Cost of which could well be less than a thousand pounds, this will achieve several things.
Prevent the sale of a pension transfer
Ensure the advice has at least two heads looking at it
Prevent the ‘bad guys’ and ‘scammers’ from getting a look in
Funding could easily come from the scheme with an extension to the Pension Advice Allowance. Importantly it comes with a positive assurance that at least two suitably qualified people have considered the options and highlighted any potential problems.
Trustees can confirm the process has happened before releasing funds.
Pension mis-selling
Contingent charging – commision from a sale that is only paid if a client goes ahead with a pension transfer encourages miss-selling and should be banned with immediate effect.
If advice has any value it should be paid for directly. It works very well with the legal profession and accountancy.
The failed sales where advice has been provided are subsidised by the others that do end up paying. Most advisers are playing a numbers game, hoping to make a couple of sales per week. Rather than being truly independent professionals.
Can you imaging going to see your Oncologist, only to be told you won’t need to write a cheque for your treatment, as they’ll be paid a fee for the advice, from sale of the recommended treatment to the NHS?

Ongoing fees
Many consumers do not under the fact that there will be an ongoing charge levied on the products arranged. For many financial advice practices this is ‘money for nothing’ as little review work is really undertaken.
Ongoing advice fee’s should be invoiced, have VAT charged on them and be used instead of ‘ongoing commision’.
It is not always made clear what these fees are for and the basis for charging them – nearly always are ongoing fees charged as a percentage of fund value – yet the same amount of work is required to manage a portfolio of £50,000 and £250,000 yet the fees charged could be massively different.
Final Thoughts
We’ve had financial regulation since 1988. Little has changed, there have been plenty of reviews and lot’s of talk – yet there is still mis-selling going on – e.g British Steel pensions – all created by regulated firms, still no ban on cold calling and still charges being levied on pension products that no one wants to address.
Why is that? Is it the same reason no one from RBS was sanctioned over it’s restructuring unit, is it the same reason that every decade has seen problems of pensions, PPI, fraud. The same people doing the same old things, still no effective competition, still no serious considerations of the options.

The state needs to either state simply – ‘buyer beware’ over the entire thing and put it’s resources into stopping the out and out fraud, or step up and start to use it’s strength and buying power to solve the problems we are facing. The half-way house, in place at the moment is serving very few.

2018 – Where Are We Now With Pensions? State pension provision is collapsing unnecessarily, there are some options (more to come on that later) and despite mandatory pension contributions in the form of Auto Enrolment plus the recently announced Pensions Freedoms many consumers have no idea what is really happening – nor how they are being milked by providers and advisers to tune of billions of pounds per year, via pension charges. Along with being let down by Government policy.
Importantly these same consumers are accepting a promise of riches from their pension schemes when they retire.
These promises are unlikely to be realised and there is nothing the pension owner can do about it. Because of charges and dire investment returns these riches are unlikely to be realised.
For many, any penson reviews will be to late, and given that pensions don’t pay out until you three quarters of your life has already past – it’ll be far too late to do anything about it.
Worse still, many UK workers, peer through the window of local council offices and schools, to see those employees feasting at the table of a ‘gold plated final salary pension’ these Government staff, will enjoy a guaranteed pension that has to be topped up by taxpayers, who will never see such a thing.

State Pension
Over the last twenty years state pensions have been altered and adjusted to the point where they are now no more than a giant Ponzi scheme. This weeks income to the system only covers this weeks cost with little or any left in reserve. Indeed any National Insurance fund the general public think there is, will be tiny if it exists.

Given that there are less people paying into the State Pension it is a reasonable expectation that any drawings from it are going to be under pressure.

It is the tax payers of today that are paying todays pension – there is no pot of money.

Future generations are being left with a liability – something they must pay for but are unlikely to receive any benefit from – mainly due to the overall reduction of the State Pension scheme but also because of the huge liabilities that are building up within public sector pensions.

No matter how this is fiddled with from a political standpoint it is not sustainable. Government keeps tweaking the system in the hope that no one notices but not telling the truth or informing the people properly. It would be wrong of me to accuse ministers and members of parliament of lying – more just not dealing with the problems that are obvious.
The #waspi campaign highlighted the lack of information provided by Government in relation to pensions. Extension to retirement ages under the state scheme were not well publicised and lots of women who expected to draw on pensions found they had to wait a further few years before getting it. We can expect these changes to continue.
Indeed since the changes made in 1988/1995 the whole area of state pensions has been under pressure. It is partly due to population growth and partly because of people living longer in retirement. All of these things have been known about and well documented since the 1980’s.

Private (Personal) Pension Arrangements
All of us have been encouraged to make our own provision. Yet, after some thirty years of personal pensions most of these are not clearly understood nor effective. The pension providers and Government do as much as they can to complicate matters. With rules and regulations that change frequently.

The big problem with any conventional private arrangements is this – you’ll never know how much the likely pension will be until you are at least halfway to retirement (at least a third dead) or maybe even longer, and

Charges have a massive impact on your final pension under any personal arrangements.

Investment performance is questionable in the main with average investment returns being bad to dire, with a handful being good.

Government Subsidy for The Pension Industry
Pensions tax relief costs us the taxpayer some £41bn per year and based on the present population (May 2018) that’s £624 per person per year, and has done little to improve the lot of the pensioner. Importantly, treasury forecasts seem to indicate that the cost of tax relief will be at £50bn very shortly (see appendix).

Based on the current set up of most defined contribution pensions all of this relief is lost in charges and therefore is more of an immediate benefit to the providers/pension managers as they levy their charges on the pension contribution/fund once the tax relief has been added, thus increasing their take.

Importantly for the individual, pensions are broadly tax neutral over the long term. When you draw down on the benefits you can take some as a tax free cash amount and the balance is taxable, in fact dependent on the actual performance of the pension fund the Government may even make a small amount of money on it’s tax relief loan to you.

What tax relief does do, is mask the level of charges levied on pensions and is an immediate gift to the large insurance companies in the UK.