The problem for fund managers attempting to satisfy a low fee culture is the inherent inability to prove they add value. While past performance is one means of assessing whether the fund manager has delivered on their promises, it offers no clue as to their future ability and cannot be relied on as a judge of skill.
The NAPF’s Wilson says: “Charges are easier to measure than value. No one has been able to make the case that higher charging schemes get better investment returns.
“All we can do is look back at historic fund performance and say that was good in the past but we know that that is no guide to the future. Keeping charges down is one really tangible way we can make sure schemes are good value for consumers.”
Cracking the code
In November last year the NAPF, in conjunction with the Investment Management Association, the Association of British Insurers and the Society of Pension Consultants, published a joint code of conduct on pension charges.
The code has two aims: “To provide information about charges to employers in a form they can understand, as part of good transparent practice; and allow a more ready comparison of charges and services so that employers and trustees are able to act as well informed customers”.
The code was born from concern that employers were not in receipt of the full picture when deliberating pension costs since fund managers disclosed AMCs rather than total expense ratios. The code demands fund managers state all charges clearly and accurately in writing before the employer makes a choice of pension scheme; provide a standard template summarising the services provided; and give clear examples of the effect of charges on employees’ pension pots.
“Employers and their advisers are making use of the information which is provided under the code. It is having an impact but [employers] need to make the best use of it,” Wilson says.
Bowles says the industry welcomes the code, but adds there is a danger that the uncertainty over which body is regulating DC – the Financial Services Authority, responsible for contract-based schemes, or The Pensions Regulator, responsible for trust-based provision – could see the good work on fees undermined.
“We are in an environment where there are a number of different structures for DC. There are a lot of consultations and people may not be clear about who they apply to and what they are, and we have two distinct regulators overseeing DC. Until we get to grips with that then some of these [charging] problems will remain,” Bowles says.
A low fee environment appears, on the face of it, to be positive for members; no one wants to see almost half their savings eaten up by fees, especially first-time pension savers. Yet focusing on costs alone ignores the complexities of DC pension provision. Keeping charges down is of course important but achieving the desired outcome is paramount and fund managers must now focus on adding value where and when it really counts.
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