The discovery of horsemeat in supermarket burgers was an unpalatable reminder that perhaps the cheapest products are not always the best, and it is sometimes worth paying that little bit more.
“The charges debate is fabulously uninformed. There is a lot of focus on costs and it is right and proper we have transparency, but the presumption that lowest is best is absolute nonsense.”
Tim Banks
Whether the same is true for pension provision, however, is up for debate.
The price paid for personal pension products has long been controversial. A Royal Society of Arts (RSA) study lifted the lid on the erosive nature of fees back in 2010 when it published a report entitled A People’s Pension in Britain which claimed charges could wipe 40% from the value of a retirement pot.
In the past 12 months, numerous surveys, consultations, research reports and codes of conduct have emerged which attempt to shine a light on the murky world of pension charges, and offer some transparency.
All this attention is, of course, motivated by auto-enrolment and the predicted eight million new workers joining the retirement saving market over the next five years.
In light of the government’s pension reform – which sees all qualified employees automatically made part of a workplace scheme unless they actively opt out – the need for low cost savings vehicles is clear.
The most recent report published by the RSA in July 2012, entitled Seeing Through British Pensions, reported that fund managers were failing to reveal the true cost of personal pensions leaving individuals unaware of the damage costs and fees can have on their final retirement income.
Such a situation is politically unpalatable at a time when government is imposing soft compulsion on millions of low-earning employees and consequently fund managers are under pressure to keep fees at around the 50 basis point (bps) mark.
Paying for what you get
Yet many in the pensions industry are anxious that an obsession with cost obfuscates the need for quality products.
“The charges debate is fabulously uninformed,” says Tim Banks, head of defined contribution (DC) sales and client relations at AllianceBernstein. “There is a lot of focus on costs and it is right and proper we have transparency, but the presumption that lowest is best is absolute nonsense.”
The very lowest cost strategies often employed by DC funds as part of the default offering come from passive index tracking. In some cases DC defaults will be 100% invested in passive global equity and members will pay fees of just 10-15bps.
Such strategies are unlikely to contain risk management and will take no consideration of a member’s age or retirement expectations. This lack of sophistication and the associated low fees are often seen as appropriate for those at the beginning of their retirement saving journey who have a long time to amass a pension pot, who can afford to take risk and who lack the ability to pay higher charges.
Richard Wilson, senior policy adviser at the National Association of Pension Funds (NAPF), says: “There is a lot of pressure to keep default strategies low cost and simple. The vast majority of people will end up with simpler, lower cost investment strategies but who is to say that they are going to be worse off because of that?”
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