Ed Milliband has recently drawn attention to the lack of transparency and high level of charges in the UK Pensions Industry. He is right to do so, even if some of the language used was unhelpful.
The facts are that, for those not fortunate enough to work in the public sector, we have a crisis of pension provision in the UK. This crisis is worse than in other OECD countries and has two root causes: a lack of savings and also very high levels of pensions and annuity charges in the UK market. Neither of which are transparent and both of which are increasing, as recently pointed out by the FSA.
Of course, the two are related. Rational “would be” savers do not trust theindustry which refuses to give people a clear picture of what they will charge in a way that can be understood and compared. In July, the RSA published a report showing further evidence of the levels of duplicity and misinformation which are endemic across the industry. Over the last decade an average pension pot has been hit with charges of between 30-50% of it’s value.
Put this to the industry and they react with arrogance, citing the jobs theycreate and the tax they pay. But this is inadequate if the cost of that is to deprive millions of people, who have tried to do the right thing, from having a decent retirement.
Ed Miliband quoted a Neptune Fund which charges around 5%. The industrytells us that that fund is not supposed to be used for pensions. So what is itsupposed to be used for?
More importantly, why is the average charge UK Fund charge a percentage point higher than the US, Denmark or Holland?
To be clear: I believe in the free market. But for the market to operate there must be cost clarity and an equal balance of knowledge. In this market there is neither and the industry has exploited consumers to make supernormal profits. The FSA estimate of the “unjustified” additional charges is around £18 billion a year. This is not a world beating industry: this is market abuse.
So far, the coalition response has been lacklustre and there is a risk of theGovernment getting on the wrong side of this argument just in time for theelection. Ministers urgently need to wake up to this problem because it is allabout to get worse.
With the immenient arrival of auto-enrolment, we are about to actually forcecompanies and employees to “save” more with this industry. As a matter ofurgency, the Government needs to do a number of things.
First, it must insist on transparency and clarity of charges. This is similar to what is being demanded of the energy companies but arguably more important. This must apply to both fund and annuity charges.
Secondly, it must review why UK charges are so much higher than those in other countries, and identify structural areas in need of reform.
Finally, the shackles on the Government’s own low cost auto enrolment provider, NEST, must be removed to allow it to do more than just compete for the business the big players don’t want.
The industry receives around £30 billion a year in tax relief, money which would be well spent if it actually helped people in retirement rather than fuelling excess profits for Fund Managers. The efficacy of this tax relief should be reviewed as should the timing of the introduction of auto enrolment. Right now we are pouring good money after bad.
