Do you know how much your pension costs? How much the folk looking after your money are charging you? No? It’s not easy to find out. I didn’t until I demanded the information. It wasn’t just the management fee they’d advertised but many times that. Small percentages that really added up.
I became suspicious when I received an annual report which didn’t list the transaction charges. I knew there had been a few in recent months but none of the fees were stated. I asked what they, and other charges, added up to. “Very difficult to say,” I was told. Of course it is. Transaction costs, ongoing charges, management fees and, when you decide you need the money, exit costs are all hidden. It was only when I said I would use the Freedom of Information Act to demand an answer that one came.
The details were staggering – more than three times the advertised charge was going in other fees, all taken from the fund directly and not listed in an annual report, so not easy to spot. This isn’t fair. For pension managers, it’s not just market movements that matter: churn (the buying and selling of funds or shares) can make a tidy profit by adding cost to the investor. Each trade often costs at least £10 with, of course, a percentage on top.
I’m a Conservative. That’s why I believe in free markets and competition. I have no problem with companies offering different services and being paid for it. But what we’re seeing in the investment industry isn’t a free market. Hidden fees make proper comparison, and therefore competition, impossible.
That’s not right. Today, billions of pounds every year are invested by people across our country. Even more will rightly be using the new Isas in coming years. They’re an important change to ensure more people save and our society is better prepared for the future. But these hidden fees mean that, whatever we put aside, the home we’re saving for will be smaller, the holiday shorter or the retirement will come later.
If you haven’t any savings, you may not think these hidden fees affect you. Think again. Auto-enrolment means you will soon have a pension. It’s great that everyone will be saving for retirement and, with annual management charges capped, they’ll be cheaper than many private pensions, but the temptation to use other fees within funds will be great. That’s why full disclosure matters for the billions of pounds in private pensions today, and tomorrow’s auto-enrolment.
Because scalping is growing. Top wealth managers have boosted their income by 7 per cent in the past year despite selling almost half as many new funds. And more than half their income now comes from ongoing fees. That’s up from a third last year. While we’re dependent on a growing economy, they’re not. Their profit comes from us not noticing what we pay.
These fees add up. Initial set-up costs of 2-3 per cent, an annual management charge of 2 per cent, and an exit fee of perhaps 5 per cent are not unusual in Isas or private pensions (auto-enrolment is capped at 0.75 per cent) and those costs can shrink savings by a third over a lifetime. And that’s based on 7 per cent annual growth – pretty good today. Think about that. Your pension could be a third smaller just because you didn’t notice a few per cent a year.
The Department for Work and Pensions (DWP) should change the rules. Today, it requires pension providers to publish an annual statement updating projected savings, net of charges. The charges should also be listed alongside the cumulative impact they will have. That would allow people to know what they were choosing. And it should apply to all savings.
Back in 2013, the Office of Fair Trading said there was “insufficient transparency and comparability of charges” in the pension market. It said providers weren’t including costs and charges within the annual management charges they quote in a consistent way so we can’t compare like with like. That hasn’t changed.
That’s why we’ve got to change the system.
Fund managers should have a legal duty to be open with their clients. That would end the culture that sees hidden fees as better than advertised costs and, with auto-enrolment pensions, enable easier switching. We need the Advertising Standards Agency, the DWP and the industry to work together. Perhaps then we would see an end to ongoing charges, exit fees and the many other stealth taxes imposed on our savings. In the long term, we’d all be better off.