Commenting on The Office of Fair Trading’s Defined Contribution Workplace Pension Market Study
19th September 2013
Commenting on The Office of Fair Trading’s Defined Contribution Workplace Pension Market Study, Gina Miller, founder of The True and Fair Campaign and co-founder of SCM Private said:
“We welcome the OFT’s recommendations for improving the quality of information available about DC pension schemes and are particularly encouraged by its recommendation that DC pension costs should be disclosed in one single number.
The OFT rightly concludes that competition cannot be relied upon to drive value for money and we have no confidence at all that the industry will deliver value and transparency without regulatory intervention to force change and safeguard consumer rights.”
Posted By: True and Fair, 4:36 pm
“In its response to the OFT the IMA highlights its Enhanced Disclosure Guidance and proposal for pounds and pence disclosure of charges, but their recommendations are not one number, do not include all costs and do not help savers or investors prior to purchase when they need to make better decisions. Consumers will remain in the dark about how much they are truly paying for their pensions and investments.”
“The IMA has said that it will ‘continue to work with its colleagues at the ABI and NAPF as well as all other stakeholders to help make auto-enrolment and the broader transition to DC a success.’ The fact that the OFT has recommended a series of reforms to improve transparency and value for pension savers suggests that the industry’s efforts to date have been utterly woeful.”
“Talk is cheap, it’s time for action. The OFT has taken an important step in the defence of consumers but the hot air in the IMA’s response is further evidence that nothing short of regulatory action will deliver the transparency consumers need.”
“The system is broken, and while the OFT’s recommendations are a partial fix they are not the full solution. We would disagree with the OFT not to, ‘seek to include investment transaction costs within a standardised AMC or total charges figure… Transaction costs should be clearly disclosed, in the interest of transparency and understanding pension costs,’ as this will allow the industry to continue to bury this cost away from investors. It may well be that in the pensions market with trustees, companies and advisers scrutinising such costs that they will be properly analysed, but in the retail savings market where there are many conflicting self-interests, even higher standards are necessary.”
“It is not just regarding transparency of charging that the OFT rightly criticises, but transparency of holdings stating that, ‘Furthermore, a recent study looking at people approaching retirement found that 77 per cent of individuals in their 50s and 60s did not know what their pension fund is invested in’ – this could be easily rectified by requiring pensions and investments to disclose their holdings in full online on a quarterly basis, which has been the rule in the US since 2004.”
“It’s time the investment industry stop the rhetoric and give a total charges figure that includes transaction costs BEFORE investing rather than bury it in a statement post purchase where few people will see it and which is not a proper total cost anyway.”
More Detailed Response
In the savings market as well as the pensions market as the OFT rightly concludes ‘competition alone cannot be relied upon to drive value for money … both their costs and quality are difficult to observe and outcomes may not be apparent for some years. This makes decision – making on value for money very difficult.’
The triad of self-interested, anti-consumer trade bodies, the ABI (Insurance), NAPF (Pensions) and IMA (Investments) have colluded over many years to hide from consumers what’s inside their pension or investment and how much it really costs as the OFT has rightly said.
‘Charges levied on scheme members can be difficult to understand and there are a wide range of different costs and charges… we remain concerned that there is insufficient visibility and comparability of charges to ensure that competition on charges is fully effective… Not all providers include all investment management service charges and expenses within their AMC.. which may further complicate comparisons, and second, the costs associated with investment management transactions (the buying and selling of assets within a fund) are often not visible. Where costs and charges lack definition and visibility it is unlikely that competition can effectively be brought to bear on them.’
It seems astonishing that when the OFT highlights the importance of comparability and showing all the costs, the investment industry led by the IMA has endeavoured to fudge the issue with its latest move to announce a ‘one-number cost in pounds and pence’ that turns out not to be one number, not be in pounds and pence, and not include all the costs.
In fact the OFT recommends ‘that regulators should agree a consistent methodology for reporting comparable information on investment management transaction costs and portfolio turnover rate.’ – it is this very same portfolio turnover rate which the IMA actually had all members stop reporting back in June 2012 and despite repeated calls by the True and Fair Campaign, the IMA has refused to re-instate in its determination to hide from investors the true costs of their fund managers activity.
Transparency and comparability of charges and costs of investing
6.19 The OFT is concerned that there is currently insufficient transparency and comparability of charges to ensure that competition on costs and charges is working optimally. Buyers of services need to be able to see and compare the charges that they are paying so that they can reach the correct judgments on value for money. We have two particular concerns:
• providers are not including costs and charges within AMCs they quote in a consistent way – which means that the AMCs being quoted by different providers are not easily comparable, and
• AMC figures do not capture all the costs and charges that a scheme member pays, in particular:
− costs associated with investment management transactions are not included in AMCs quoted by any pension providers
‘we would question whether ‘total charges’ is an appropriate final name for the figure given that it would not include investment transaction costs.’
SCM Private has since its inception criticised the laughably named investment cost metric known as the Total Expense Ratio (now called ongoing charges) which excludes transaction costs. It’s about time the investment industry woke up and became honest and gives a total charges figure that includes transaction costs before somebody invests rather than bury it in a statement after they have invested, that few people will see and which does not produce a proper total cost anyway. We would however disagree with the OFT not to ‘seek to include investment transactions costs within a standardised AMC or total charges figure. Transaction costs should be clearly disclosed, in the interest of transparency and understanding pension costs’ as this will allow this industry to continue to bury this cost away from the prying eyes of investors.
It may well be that in the pensions market with trustees, companies and advisers scrutinising such costs that they will be properly analysed, but in the retail savings market where many self-invest, even higher standards are clearly necessary. We hope that the Financial Reporting Council whose accounting standards and principles have been totally obfuscated by the IMA in its latest proposals regarding annual fund reports, looks closely at the OFT statement and takes its responsibilities seriously.
It is not just regarding transparency of charging that the OFT rightly criticizes but transparency of holdings stating that ‘Furthermore, a recent study looking at people approaching retirement found that 77 per cent of individuals in their 50s and 60s did not know what their pension fund is invested in’ – this could be easily rectified by simply forcing pension funds as well as other investment funds to disclose their holdings in full on line to investors as has been the rule in the US since 2004.