Six years ago I beat my head against a brick wall. Not literally. I did the equivalent in the world of personal finance: I tried to get my occupational pension provider to send me useful annual statements.
The documents that were turning up from Friends Life (since swallowed up by Aviva) were a bad joke.
They told me the value of my pension pot. They told me the value of payments into the “defined contribution” scheme over the past 12 months. There was even a guess about how much the pot might grow over the next three decades. Yet there was no information on the returns on my investments over the past year. Nor was the reanything on the amount I’d paid in charges.
This struck me as pretty important information as far as my retirement planning was concerned. How were my investments doing in absolute terms, or relative to the overall market? How much was I paying in fees for that performance? Should I switch funds? To make those decisions I needed information.
So I asked Friends Life for statements that included it. Sadly, the computer, or rather the bureaucrats in charge of the Friends Life computer, said no. “We have over 5 million customers and we are unable to change our processes and statement information for an individual customer,” was the cold response. And that was that. Why didn’t I move my pension pot to another provider, one who would provide me with the information I desired? Because then I would forego the monthly contributions that my employer was also making into that Friends Life pot, matching my own.
So I was trapped. Members of defined contribution occupational pension schemes – there are now 13.5 million of us with around £ 400bn invested – are effectively a captive market for pension companies. And we get get the customer service that tends to come with a captive market – that is to say, none at all. Yet could the door of the jail have opened, just a crack? The government has been rolling out automatic enrolment in workplace pensions over the past six years (a good idea by the way) and a review of the system in 2017 looked at the issue of annual statements. “There is a concern amongst providers that the proportion of people who open their annual benefit statements is low; the proportion who read and understand their statement is even lower, and that the proportion who may feel motivated to act upon the information is lower still,” it said. Who could have guessed? The review noted, with approval, that a pensions industry group, led by Ruston Smith, head of the Tesco Pension Fund, was looking into reforms. Smith unveiled the results of those efforts last week at the Pensions and Lifetime Savings Association conference. The new model statement is certainly an improvement. It is clear, concise and avoids jargon. It reads like something actually designed with ordinary pension savers in mind. And it includes information on investment returns, unlike those useless Friends Life ones I was sent.
Yet there’s something vital missing. There’s no information on charges. This is odd because an earlier draft of Smith’s statement did include a line on fees paid. So, incidentally, did the example statement given in the government’s auto-enrolment review. When I asked Smith about the omission, he said that he did hope that future versions would include some information on fees, but that there was a fear in the industry that a raw charges figure could be potentially misleading and induce people to make bad decisions about fund selection, perhaps to stop saving altogether. “The lowest cost doesn’t necessarily mean the best proposition,” he said. “Buying pensions isn’t commoditised like buying electricity for your home.”
This is not a wholly unreasonable argument. One should be wary about unintended consequences of giving bad or context-free information to savers. The new “Key Investor Documents” for mutual funds and investment trusts, mandated recently by poorly designed EU regulation are, as John Kay has pointed out, disastrously misleading, with their automatic extrapolations of recent returns.
Yet the idea that a fee line in statements could be dangerous seems grossly overblown. In an environment when people now have the freedom to cash in their entire retirement pots at once and, as the ex-pensions minister Steve Webb put it, “buy a Lamborghini”, it seems a strange priority to be fretting about the potential for people to overreact to a fee figure on a pension statement.
Moreover, those fee figures are simple facts – unlike the projected growth figures for pots which are also included on the model statement. Those are based on assumed returns which may well not materialise.
Arguably, those made-up numbers, even if they are reasonable, represent a far more significant misleading signal to pension savers.
The reality is that the industry is resistant to the inclusion of fees on statements because those fees are source of easy – and extremely large – profits to the asset management industry and it suits them to keep customers in the dark about them. This isn’t some conspiracy theory: the head of the Investment Association was sacked in 2015 for attempting to increase transparency on fees. An investigation by Which? in 2016 found that the pension fund versions of popular retail funds sometimes had fees that were twice as high. This is nothing less than the gouging of a particularly uninformed, inert and captive customer base.
We know that pension savers do not understand how fundamentally important it is to keep fees down. In 2012, the Royal Society of Arts, in a project led by David Pitt-Watson, presented a focus group with the maths showing that an annual fee of an innocuous-sounding 1.5 per cent a year will eat up over a third of a pension pot over 25 years.
“They were aghast. They had not understood the mathematics of charges,” said the RSA report. “It is simply not made clear to them that a pension provider with a charge of 0.5 per cent will, all else being equal, provide a pension which is a third higher than one which charges 1.5 per cent”. And this is before even getting into the question of hidden transaction and trading costs.
Study after study confirms that most expensive actively managed funds, after fees, perform no better than cheap passive index tracker funds. Fees and costs, for the vast majority of pension savers, will matter far more than fund selection. As the RSA rightly concluded, the best way to get people to appreciate this fact is to let them see those fees – in straightforward cash terms – on an annual statement.
Costs are not peripheral to pension empowerment. They are the very heart of the issue. The new pensions statement is an improvement. But people need to see those costs spelled out – and the industry needs to cease its resistance and devote its energy to making it happen.