Yesterday the highly insightful team from the Pensions Institute at Cass Business School delivered its latest report: Assessing value for money in defined contribution default funds.
I doubt it will top too many bestseller lists, but if everyone who has ever saved for a pension were to read it, it could incite them to rise up and demand better value for money.
Collectively we, as pensions savers and pensioners, who use defined contribution (DC) pension plans are losing hundreds, if not thousands or even tens of thousands, of pounds due to the way DC default investment funds are priced and sold.
This is going to get worse given that the value for the defined contribution (DC) pensions market is predicted to grow more than six-fold by 2030, from £276 billion assets under management pre-auto-enrolment (2012) to about £1.7 trillion.
It makes me want to wake the sleeping nation and tell them of this horrendous state of affairs. But my fear is that the only message they will hear is ‘pensions are bad’ – which is the complete opposite of what I want. ‘Your pension could be better’ is the message we really want them to hear.
So what is the problem?
Short of reproducing the report (see attached: Assessing value for money in defined contribution default funds), I will restrict myself to one narrow area of findings that caught my eye.
The report points out that pensions providers prioritise their services directly opposite to the old saying ’He who pays the piper calls the tune’. In pension provider world corporate advisers are top of the pile (because they advise the product to employers). Second comes the employer, which acts as the unregulated agent to the provider.
Bottom of the pile is the employee pension plan member who ultimately pays for the service and has no say over either the piper nor the tune.
This might not matter if everyone was getting good value for their pensions spend. But, as the report, found there is a big gap between those getting a decent deal and those getting a bad deal – all down to the ongoing costs associated with being in a pension.
When the Pensions Institute measured a range of real life pension plans saving an 8% contribution over a 40 year period, it found that the default fund with highest mean replace rate of 23.8% (i.e. ratio of pension paid compared to salary paid in final year of employment) was 55% higher than that with the lowest mean replacement rate (at 15.3%).
The report stated:
- This was largely due to charge differences
- As a guide, each percentage point increase in the total expense ratio (TER) leads to a fall in the expected replacement ratio at retirement of about 20%.
The other finding on the analysis of these real life pension plans that caught my eye was that “While ‘cheapest’ is not synonymous with ‘best’, there is no evidence that higher charges can ‘buy’ more sophisticated investment strategies that deliver superior performance. Default funds with low charges were consistently among the better performers, while default funds with high charges were consistently among the worst performers.”
The problem is, too often, we do not even know what these charges are for. Even the researchers for this report battled to get full information – so what hope for employers trying to implement good governance and the even poorer employee?
So one of the recommendations of the report is for all plans to have a clear definition of costs and charges, reported in full. All costs extracted by the default fund and the scheme should be reported in full to scheme governance boards and to regulators “so that component parts of the member charge, as well as the total, can be evaluated in relation to member value for money.”
It also recommended that full disclosure data should be published on a central website for independent public scrutiny, because, as Debbie Harrison, visiting professor at the Pensions Insitute at Cass Business School, who presented the findings pointed out: Most members will not look at these charges nor understand them. But there are people who will, who can defend consumers.
I whole heartedly endorse this.