Workplace pensions need to be much easier to understand
Pension providers need to make things much clearer for the people whose money they’re looking after, says Merryn Somerset Webb.
I used to have a workplace pension with Standard Life. It was awful. I got a letter every year with a "plan summary" on it. It told me last year's value, this year's value and the amount added into my plan over the year.
It did not include a summary of the things I would have really liked to know, namely the returns on the money invested over that year (and annualised since launch), the cost of investing that money and the effect that those costs had on the plan.
I realise the latter request might be over-asking for an industry desperate to keep the biggest impact on investment performance a secret for as long as possible. But the first two should definitely have been included.
I never figured out how well those investments had actually performed. I stopped paying into it years ago it paid an annual commission to an IFA I had only the vaguest of memory of meeting when the scheme was first set up.
I am now back in the world of the workplace pension. It's OK. Times have changed: my new pension isn't great, but it isn't completely awful either. This time, the provider is Aviva. The default fund I'm in isn't particularly satisfactory. It is mostly passively invested and in assets I don't really want much of.
Do I really want to have nearly 30% of my pension in US equities when they are as expensive as they are now? Do I want to be heavily invested in the US bond market (nearly 7% is in ten-year US Treasury bonds) when Wednesday's meeting suggests the Federal Reserve really is going to have a genuine go at moving away from quantitative easing? I don't think I do.
I'm not against passive investing (as regular readers will know). But if I'm going to do it, I want some control over my asset allocation and crucially I want to pay passive prices. At Aviva, I'm being charged 0.6%. That might be rather less than some of the big active funds charge. But you can pick up a Vanguard LifeStrategy Fund which in the end isn't so different to Aviva's grandly named Aviva Diversified Assets Fund II S6 for a mere 0.22%.
And this Aviva fund is huge. According to the fact sheet, it has a total assets of £1.5bn in it (meaning the 0.6% annual management fee comes to £9.3m). Nice work if you can get it. The upshot is this: I'm not getting as much of a raw deal as I might have been in the old days. I've just ended up with a slightly overpriced and mildly mediocre investment. I'm not thrilled. But let's face it, for the financial industry and me, the fact that I'm not actually furious represents progress.
The good news is that I don't have to keep the default fund. I can open a "MyAviva" account online and pick something else. But this isn't 100% satisfactory either. I'd like to swap to the Baillie Gifford Managed Fund offered on the site. It has returned 41% over the past few years. I know that while it has still a 20% allocation to the US, it won't be remotely passively invested (I've looked at it before elsewhere).
This means I also know I can buy it elsewhere for much the same price as my default fund. The problem is that I can't do that via the Aviva platform. The 0.6% they are charging me on their default fund turns out to be a base fee. If I want that Baillie Gifford fund, I will have to pay an extra 0.35% (so a total of 0.95%). Irritating, isn't it?
I'm afraid that this isn't the end of my complaints. Next up is communication or rather, bad communication. All workplace pension providers are guilty of this. I suspect most of their customers will end up in these slightly overpriced and mildly unsatisfactory default funds for their entire careers. Because when they get the handbook and the two letters totalling 27 pages that I recently received, they will probably never make it to the pages where they find out what fund they have (page 12) or the one where they find out what it costs (page 17).
You can try to shortcut the bumf online, but you have to know what you are looking for. You will say I am quibbling here that it doesn't really matter. The fund is fine. The costs are OK. The information is perfectly comprehensive for anyone prepared to focus for an hour or two. And to a degree, I am quibbling. But I think I am right to do so.
The government has given a great gift to the pensions industry in the form of handing over of billions of pounds worth of savers' and taxpayers' cash for them to skim as they see fit. Let's not forget that every pound of tax relief given to savers is a pound for the industry to take anad valoremfee from. This is probably why the big fund managers and insurers have been so keen on auto enrolment. Yet they are doing no more than the bare minimum to earn it.
They offer products you can't criticise too much. They charge headline prices that most don't recognise as particularly high. And they provide all the information they are legally required to provide even though much of this is in a place that I doubt the majority of people will bother to reach.
I don't think that's quite good enough. The regulators know this: from January, providers must reveal their transaction costs clearly to workplace pension savers.
If you're in a workplace pension, check your default fund and your charges. If you don't like what you see, ask questions. And for any pension providers reading this, here's a free letter template I'd like you to consider making page one of anything you send your clients:
We invest the money you and your employers give us (currently a total of £X a month) so that you will have a pension pot to help you pay for your retirement. It is in the X fund, which is invested in shares in companies around the world as well as some bonds. This fund has made a return of X% every year on average over the past X years. That's X% above/below the industry average. We hope it will make XX% in the years from now until your retirement.
You don't have to stay in this fund: if you have other ideas about how you would like to invest the money please call us, or read more about your options on our website.
As you can probably imagine, we don't manage your pension for free. It will cost you X% of your contributions per year to be in this fund (there are no other charges or costs at all). If you have £10,000 invested that's £X. That is X% above/below the industry average.
There are 10 other pages to this letter, which we have attached for regulatory reasons, but you now know all the important information. We will send you another letter updating you in a year. You can also go online at any time using this password (unique to you) and check on your pension and the investments in it. Please call us if you have any questions.
This article was first published in the Financial Times.