Monday, July 23, 2012

Coalition in Pension Fees Clampdown?

James Hall of the Telegraph reports, Coalition in pension fees clampdown:

Announcing a clampdown on excessive pension fees, Steve Webb says that thousands of people are trapped in expensive old-style pensions, which can charge fees of up to 4 per cent of a pot’s value every year.

Savers can also be charged up to 20 per cent of a pension’s value if they switch to a better scheme. The hidden fees can wipe £100,000 off the value of a worker’s retirement fund.

Writing in The Daily Telegraph, Mr Webb says: “I would like to see the leading companies look again at their ‘back book’ of old pension policies.

“They should ask themselves if the battered reputation of their industry would not be greatly enhanced if they were to revisit these schemes and offer scheme members fairer terms.”

Mr Webb warns that the Government will act within months to cap excessive fees if it has to.

Thousands of savers are stuck in old savings schemes which pre-date the 2001 introduction of stakeholder pensions, which are subject to strict regulation. Many of these old schemes from the 1980s and 1990s have terms that pension companies “would not dream of offering to new customers” today, says Mr Webb.

The clampdown on fees comes two years ago The Daily Telegraph disclosed that a range of little-known fees and levies can wipe tens of thousands of pounds off the value of a middle-class worker’s private pension.

Last year the National Association of Pension Funds (NAPF) said that fees are too high and that consumers face an “eye wateringly complex” system of hidden levies. It called for greater transparency when it comes to fees.

The minister also plans to ban pension companies from being involved in the Government’s flagship auto-enrolment programme if their charges are too high.

Under the programme, which starts in October, 10 million people will automatically be given workplace pensions.

“I remain determined to make sure that every pound that [savers] put aside is turned into the maximum possible amount of pension.

“And if further measures are needed to clamp down on charges, then we will not hesitate to take them,” says Mr Webb.

The minister’s comments come as trust in the pensions has hit an all-time low. The NAPF has warned that Britain is “sleep-walking” into a pensions crisis.

The number of people contributing to personal pensions fell by 400,000 to six million people between 2008 and 2010.

Although Mr Webb says that in general pension charges “are coming down dramatically”, many pension companies still charge too much.

Research last week by RSA, a think tank, found that nine in 10 of Britain’s biggest pension fund managers fail to warn people about hidden fees. The report found that workers are routinely being denied low-cost pensions that are readily available elsewhere in Europe.

Ed Miliband, the Labour leader, said that high pension fees are a “scandal”.

As well as looking at old-style pensions, Mr Webb says the Government is “watching” charging levels in so-called ‘default funds’, which are retirement funds in which savers’ money is invested if they do not make an active choice about how their money is used.

The Government is trying to shore up confidence in the pensions industry prior to auto-enrolment starting in the autumn.

Pension funds that will run auto-enrolment schemes for businesses have already said that their annual management charges will be in the region of 0.5 per cent, which is “very low by historic standards” according to Mr Webb.

However he warned that the Government will not hesitate on banning pension companies from offering auto-enrolment services if their fees are too high.

“We could take action within months so the industry has every incentive to do the right thing here,” the minister says.

Joanne Segars, the NAPF’s chief executive, said: “People need to be very wary of high rates, and it needs to be much easier for them to find out what they are being charged, and why.

“We want to see much more clarity around charges.”

Industry insiders defended exit fees.

Otto Thoresen, director general of the Association of British Insurers, which represents pensions providers, said that any “exit fees” from old pension schemes are “always made clear in the terms of the contract”.

However he said that the ABI is talking to its members to uncover the scale of the issue.

New research by actuarial firm Hymans Robertson found that only one in six people say that a good pension scheme is a key factor when looking for a new job.

Meanwhile only four in ten people would chose to take a significant 10 per cent increase in annual pension contributions from their employer over other, less generous rewards, its research found.

Lee Hollingworth, a pensions expert at Hymans Robertson, described the findings as “staggering”.

The findings are “staggering” but don't surprise me. Most people are completely clueless of how important their pensions are to their retirement security, where their money is being invested and how they're being raped on fees by the financial industry.

In another Telegraph article, Paul Farrow reports, Pension charges are only part of the problem:

My company pension statement arrived last week and it didn't make for happy reading. For all the money the Telegraph and I contributed into my defined contribution (DC) pension scheme, I didn't get back what I put in – I ended the year £10 down.

Given that for much of the time I live and breathe pensions in my role as personal finance editor, I wasn't surprised. Our live blog on the Telegraph website means that you can never escape the uncertainty that has gripped markets – "FTSE falls to new six-week low" or "Eurozone crisis rocks markets" are typical of the headlines we have seen all too often over the past year.

I wonder what workers make of their statements and it wouldn't surprise me if many say "what is the point?" and give up.

The worry is that later this year millions of workers will be automatically enrolled into a pension scheme.

Yet there is a stark lack of awareness about pensions. The National Employment Savings Trust (Nest), which is the main player in the new auto-enrolment scheme, has just done some research among its target audience.

Nest said people tended to ask three key questions. What will I get at the end? What happens to my money? And why does my money go up and down?

It said many people had no idea that their money was invested at all.

"Many think their money is in some sort of bank account and are completely surprised it is invested at all. They don't expect to see volatility," a spokesman told me.

This is why Nest is adopting more cautious strategies for its funds – in the hope that workers won't open their statements, see that the fund value has plunged by 10pc, and then stop contributing altogether.

Much has been made of the level of pension charges over the past week and how it cuts into the final value of your pot. The industry is moving to lower costs and much of the concern is about older-style contracts where annual fees could reach 4pc. But charges are only part of the problem.

The ultimate test of whether a DC scheme is a success or not is the performance of its default fund. After all, four in five workers opt for this fund – or, to put it another way, they show little interest in their company pension so are automatically placed in the default fund.

Despite efforts to the contrary, education and communication to engage workers to take responsibility for their pension are a slow burn. This in turn puts the spotlight firmly on the quality of the default fund. Yet the quality of the default has often been questioned.

Not too long ago, the Cass Business School warned that unless the quality of default funds was improved, DC schemes put employees' retirement prospects at risk. It found most traditional default funds did not match members' needs in terms of asset allocation and risk profile. This is perhaps hardly surprising. Many default funds are still filled to the brim with equities and do little to protect members from the vagaries of stock market cycles and macroeconomic issues.

And then there is another crucial factor in what pension we get when we have a DC scheme – annuity rates. Most of us will convert our pension pot into an annuity to get a fixed income for life, but annuity rates are at record lows and show no sign of improving. Those retiring today are hundreds of pounds worse off than those who retired five years ago – even if the value of their pension was the same.

Pension experts urge savers not to give up and tell us to hang in there as it's a long-term game. Besides, they say, you get tax relief and if your company's paying it's as good as free money.

That is as may be, but if someone such as myself (who ought to know a thing about the reality of what you need to save to have any chance of a comfortable retirement) is concerned that a DC pension fund is not going to be enough, where does that leave those who think their money is being invested in a bank account? More than a little disappointed, I suspect.

Excellent points raised in the article above and let me tell you straight out, defined-contribution (DC) pensions are nowhere near as good, safe and secure as defined-benefit (DB) pensions, which is why I agree with pension leaders who make the case for boosting DB pensions for public and private sector workers.

And while I applaud Britain's effort to reduce pension levies and introduce more transparency in pension fees, it's a day late and a dollar short. More importantly, if they truly wanted to make a difference in widespread pension poverty, they would realize that DB plans are much more effective at reducing fees and they perform better than DC plans.

My last comment on America's 401(k) nightmare highlights why the shift away from DB plans is a disaster. At this writing, the Dow is down 220 points on fears of that Spain and Greece's debt crisis is getting worse.

As stocks tank and interest rates plunge to historic lows, it's hitting workers, savers and pensioners.It's also exacerbating pension deficits, forcing pension funds hungry for yield to invest more into alternative investments.

Below, leave you with an interesting discussion on the UK pensions and retirement crisis. Listen to this discussion, extremely interesting.

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