Pension fees and management charges

Tonight’s Panorama focused on pension charges. The point needs to be made that pension fees and annual management charges can eat heavily into the pension pot and that even tenths of percentages can make major differences either way to the annual pension earned from defined contribution schemes. Indeed, David Pitt-Watson has made this point excellently for the RSA and also for Unions 21.

However, I’m not sure that the populist style of reporting here is at all helpful. A simple comparison of the total lifetime charges of a pension fund and the contributions invested ignores the amount of investment returns and, while growth over the last ten years has been low, a person now retiring who started their fund 40 years ago would simply not be in this position. To ignore investment growth of funds in the interim is frankly alarmist, even where the sizes of the fees involved is quite shockingly large and inexplicable in terms of the costs of the activity involved in securing that growth (or, better said, the opportunity for that growth). The situation facing people with defined contribution schemes is difficult enough without causing further panic, and this is the reverse of what we need when it remains true that the state is becoming increasingly reliant on people taking sensible, mature decisions over saving for their retirement.

What we do need, in contrast, is a clear education campaign on the relative costs and implications of changes and AMCs, and we do need to cut through the lack of expertise which makes pensions investment decisions so frightening as to induce sclerosis. Markets don’t thrive on lack of information and opaque structures – though bad practices and profiteering certainly do. The case for regulation here is pretty strong – and, in this direction, Panorama has shone a useful light.


Pensions: going down a bomb in the boardroom

A belated welcome to last week’s publication of the TUC’s annual PensionsWatch survey.

This is a really useful reminder of the true nature of the pensions divide in the UK – not between public sector and private sector, but between the pensions of senior executives and everyone else. Among the findings of the 2010 survey, we find that the value of the average executive pension pot has increased by 11.7%, to £3.8m – a sum that would deliver an annual pension of over a quarter of a million, some 26 times the average occupational pension in payment. Over half of all directors in the survey are in defined benefit schemes (a percentage coverage reached among employees in general in 1983, since which time it has fallen back to less than one-third), even though many such directors retain such provision despite having closed it for many of their staff. And the average contribution into an executive’s defined contribution scheme was 19% – three times the average for shopfloor workers. For executives not in a scheme, the average cash payment was £120,000.

As Brendan Barber pointed out, directors have been in the vanguard of attacking pensions provision in the UK, via its so-called ‘independent‘ pensions commission with the Institute for Economic Affairs, while a more fair and reasonable approach would be one based not just on greater transparency of executive pension arrangements but a common scheme for all in the organisation. Not least since taxpayer support for executive pensions is so huge. The point is not lost on Joanne Segars, of the National Association of Pension Funds, which has ‘real concerns‘ about the issue on the grounds of fairness. Real change, however, is likely to require a somewhat stronger intervention.

On top of today’s research showing that executive bonuses are back to pre-recession levels, the notion that it’s business as usual in the boardroom, regardless of what is going on elsewhere in the economy, is one that increasingly seems to define our modern age.