Pensions transparency: judge for yourself, don’t wait for the industry

CEO of NOW: Pensions Morten Nilsson

CEO of NOW: Pensions Morten Nilsson

It is no secret that many feel the UK pensions industry is far from transparent.

The Annual Management Charge (AMC), the fee associated with the investment managers who run the fund, is well documented for most pension schemes.  Costs for transfers in and out of schemes aren’t always immediately apparent, but can often be found without too much trouble.  But what of other transfer fees, brokerage fees, audit and legal fees?  Even the EU enforced Total Expense Ratio (TER), the total costs associated with the fund as a percentage of money invested, doesn’t cover everything.   Many figures may only be found by delving into scheme documents and reports which most savers will never see.

SCM Private, itself an investment manager, is just one voice among many claiming that charges are unnecessarily opaque.  In a report they published in February this year, they claim that “hidden” costs, those not immediately apparent, may account for as much at £18.5bn being taken out of pension schemes every year.[1]

The Work and Pensions Committee has made clear its belief that the pensions industry needs to offer and effectively communicate value for money.  According to their 8th Report, printed 7th March 2012:

It is imperative that the pensions industry establishes a clear, accessible and universally-adopted model to allow the comparison of charges and that this is in place by the end of 2012.[2]

With 49% of the UK workforce not saving enough for retirement[3], and auto-enrolment just around the corner, clearly something needs to be done to restore consumers’ faith in the pensions industry.  Many of the Work and Pensions Committee’s own suggestions, including standardising fee formats and comparison methods, enforcing annual charge breakdowns in cash terms, and establishing a price comparison website, may do much to earn public confidence.

In the meantime, however, the practical solution is simply to spend the time shopping around, and to select a pension provider who is genuinely transparent in the first place.  The Investment Management Association has claimed that hugely costly hidden fees are a “myth”, and has published figures that purport to show that transfer fees do not undermine fund performance[4].  This does not alter the fact, however, that it is better to know as much as possible in advance when it comes to fees in order to make an informed decision.  And if enough people vote with their feet in favour of transparency, maybe the wider industry will finally start paying attention.

[1] SCM Private, 2012.  Promoting Transparency and Trust in the UK Investment Management Industry.  SCM Private LLP

[2] Work and Pensions Committee, 2012.  Work and Pensions Committee – Eighth Report: Automatic enrolment in workplace pensions and the National Employment Savings Trust.  Commons Select Committee Publications

[3] Scottish Widows, 2011.  The Scottish Widows UK Pensions Report: Seventh annual report on the state of retirement savings across the nation.  Scottish Widows PLC

[4] IMA, 27th January 2012.  PRESS RELEASE: IMA Analysis Challenges Accusations of ‘Hidden’ Charges.  Investment Management Association.

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