This is going to be fascinating

The Office of Fair Trading will criticise pension providers for increasing management charges on retirement funds left dormant by employees who have moved jobs.

The higher charges for these “deferred members” can wipe almost a third off the value of the savings pot they build up by the time they reach retirement.

Clive Maxwell, the OFT chief executive, is also expected to argue that the annual fee charged by fund managers on workplace pensions nationwide should be no more than 1 per cent – in line with suggestions made earlier this week by Steve Webb, the pensions minister .

This could put pressure on ministers to explain why Nest, a scheme established by the Government to provide pensions for staff of smaller companies, takes a 1.8 per cent cut on contributions.

OK, charges on pensions might be “too high”, whatever that means. But there’s going to be a fascinating part to the inevitable arguments about this.

For I would wager considerable sums that the people who will complain about such charges, who will proffer up their newly minted solutions (ie, Mssrs. Hines and Murphy) will also be those who generally insist that Stamp Duty, indeed a financial transactions tax, are wondrous things that definitely should be higher.

Without their noting that the people who actually bear the incidence of such taxes being those pensioners who suffer lower pensions as a result.

Either high charges leading to low pensions are a scandal which we should solve or they’re not. What the charges are is something of a secondary consideration, don’t you think?

11 comments on “This is going to be fascinating

  1. Having, some while ago, been obliged to take on an oversight role on a person’s financial affairs I was completely stunned by the annual charges levied on managed share portfolios.
    Shit! Many, many moons ago I used to do this job. Back in the days when a valuation was done with a copy of the Official List, the back pages of the Pinkun’ & a wind the handle calculator. And the valuation was 90% of the job. The actual management of the investments was a piece of piss. Economy of scale, of course. Handling of similar portfolios is what I did. You only have to make decisions on shares once then apply to each recurring instance.
    Alas, no option on management charges. We’re obliged to have professional management & all the managers charge much the same.
    Really don’t follow this. My experience was way before Big Bang. Thought that was supposed to bring dreaded competition to us antediluvian habitues of Lothbury coffee houses. We didn’t charge a fraction of these current fees.

  2. Just occurred. That ‘third’ figure above’s spot on. Looking at our portfolio ‘expert management’ it’s grown at about the rate you’d get from sticking pins in a list of index shares. And indeed, the share of the appreciation plus the principal we’re not now enjoying is the third swallowed up in management charges

  3. And the reference to Stamp Duty/FTT doesn’t really work. They’re incident on transactions. Like the charges that paid my wages. Management fees are applied to wealth, Like that bloody LVT mentioned above. So when I looked at the valuation included the damage wreaked by our portfolio’s over reliance on banking shares it was less the charge for making that ruinous decision.

  4. The OFT complaint is not about the level of the charges but about ex-employees paying a higher rate than current employees, which is discriminatory.

  5. @john 77
    Then let’s hope the OFT widens its remit. Even the suggested 1% is an extraordinary amount, bearing in mind what’s involved in fund management.

  6. @ bis
    Well, yeah
    But back in those days, we used to come in on January 1st and the actuaries did not use a hand calculator – they added up the whole column in their heads. Us underlings had to check their numbers (those without maths degrees were allowed mechanical calculators): I don’t remember anyone finding a mistake. Overseas investments were usually completed on January 2nd because the OL or equivalent had to be posted to us.

  7. @ bis latest comment
    1% is too much if that is the cost for adding less than 3% to the return (and even at that rate it is asking for trouble).
    What are the charges for a passive fund, doing zilch?.
    Maybe the problem is with admin costs rather than the salaries of fund managers
    30-odd years ago I was pushed into a fund management role where my salary was about 3% of my team’s added-value (the excess return we achieved compared to the appropriate index).
    The salesmen pushing index funds (every single one of which is inappropriate to every single one of your clients) are comparing the cost of active funds after expenses with those of index funds before expenses.

  8. “What the charges are is something of a secondary consideration, don’t you think?”

    Not at all, especially when nominal returns are so low. Furthermore, many fund managers offered by pension plans are basically closet indexers that charge 2-3x (or more) than an index ETF that would give the same risk exposure. It’s a ripoff.

  9. “Maybe the problem is with admin costs rather than the salaries of fund managers”
    What admin costs, john77?
    At the time, I was connected with a company used to manage pension funds in addition to 6 unit trusts (2 in the year’s top 10 performance listings) & a string of insurance funds. About a billion quid in all, when a billion was serious money. If you stripped away the detractor operators (remember them?), copy typists etc (all songs now performed by Silicone & The Chips) it’d leave you 4 blokes, a secretary & the tea lady for the entire concern.
    So what do they find needs administering?

  10. @ bis
    all the paper in the paperless office, someone to check every single thing that the fund manager does (JP Morgan has just paid out $920m for not doing so), cost of computer programs, submitting returns to the regulator and translating those into something the client can understand, office rent, legal advice, collecting data on every new entrant to the scheme, and whatever else adds up to 1% of assets under “management” for an index fund

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