"Maybe it's time for the industry to counter-attack, and demonstrate just how much of the charges it imposes on pension savers arises from government and regulatory diktats?" says Aries' Ian Neale.
Forever and a day politicians of all parties have seized any opportunity to attack the pensions industry on the issue of charges. As so often is the way with legislators, extreme outliers have been held up as typical and deserving severe punitive action, and over the past 20 years the industry has not managed to defend itself very effectively.
In fact, it has seemed keen to demonstrate that it can and will oblige, and that mis-selling and other nefarious activities are a thing of the past (notwithstanding naughty siblings bringing shame on the family over things like PPI). After the stakeholder pensions mini-revolution, a 1% annual management charge, initially seen as purely aspirational by defined contribution (DC) providers generally, rapidly became a bar to get under. Nowadays an Annual Management Charge (AMC) around 0.6% seems more common.
Exactly how that has happened is not clear. Undoubtedly the industry has become more efficient, with modern IT and the web increasingly important. Dragging costs in the opposite direction, though, the compliance burden has grown year on year. Anecdotal evidence suggests profitability of new business is now wafer-thin and not helped by the imminent legislative ban on so-called consultancy charging for implementing auto-enrolment.
So maybe it's time for the industry to counter-attack, and demonstrate just how much of the charges it imposes on pension savers arises from government and regulatory diktats? Ideally this could be presented graphically, which I dare say would resemble a rising exponential curve over the past decade in particular. Pensions could be a lot cheaper if the Government applied its oft-vaunted principle of proportionality to compliance.
After all, who asked for all this? Apart from politicians' constant tinkering with the legislation, who pleaded for the Financial Services Authority (FSA) to be given more money every year? With the demise of yet another failed regulator, can we hope for a less burdensome and costly regime from the Financial Conduct Authority (FCA)?
An open and public discussion about the whole subject of charges could be healthy. After all, another buzzword in government circles is 'transparency'. And when politicians talk about transparency in connection with pensions and pension charges in particular, they're not likely to roll over and accept a switch from AMC to Reduction in Yield (RIY) or Total Expense Ratio (TER) instead, for example, because all these terms are (a) jargon; and (b) expressed as percentages.
As an Independent Financial Adviser (IFA) once said: "Half my clients don't understand percentages"; so why not do as banks and SIPP providers do and capitalise charges instead? It's far easier to understand what pensions are costing you when represented in pounds. It's also easier to accept than an alternative where you pay twice as much as someone whose fund is half yours, for what seems like the same service. Some might snort we've had this debate and don't want to go there, but it might arise anyway so best be prepared.
Written by Ian Neale, director, Aries Pension & Insurance Systems Ltd
ian@ariespensions.co.uk
