What actually happens to the money that goes into your pension each month? Most of us try not to think about such things. Isn’t life boring and stressful enough already?
But just imagine for a moment. If pushed, you’d probably guess that your cash gets invested in the stock market, where the money is stored (and hopefully grows) until you draw it down in retirement. If pushed a little further you’d probably guess that some of your monthly savings are used to pay the salary of the man or woman that manages your money.
But actually your cash, in recent years, has gone on a much more exotic trip than that. How many of us would guess that our money has been used by our pension fund managers to pay large fees to investment banks, which then provide these managers with special face-to-face access with the men and women who run the companies in which they then invest our money? And that these chief executives sometimes didn’t even know their time was being bought?
How many of us would guess that our money is used by these same fund managers to pay for reams and reams of “research” of questionable value from those same investment banks in which analysts recommend which stocks and shares to buy (stocks and shares that those same banks are often, by happy coincidence, selling themselves)?
How many of us would guess that a slice of our money is spent by our fund managers every single time they decide to buy or sell shares (something that happens rather frequently) and that the fee usually goes to those same investment banks?
Maybe some of the more worldly wise among us would guess that at least some of the above was the case, that these are the annoying but inescapable costs of doing business in the pension investment world.
Yet how many of us would honestly guess that none of these expenses are covered by the "annual management charge" that’s cited by the fund manager in the brochure that is sent to us when we open a pension, or in any of the subsequent statements, and that all these charges are simply stealthily subtracted from the value of our pension pots?
And how many of us are truly aware that all these hidden charges can add up over a year to more than twice the typical 1.5 per cent (or so) annual management charge that’s quoted to us by our pension fund managers. And how many of us are aware that over the lifetime of a typical pension these hidden charges can eat up as much as 30 per cent of what it would otherwise have been worth?
How many of us are aware that the investment fund management world had someone who wanted to reform much of this? His name was Daniel Godfrey and he was head of the Investment Association, an industry group representing asset managers. Godfrey wanted to introduce much more transparency over fees and charges. But his reform drive came to an abrupt halt last year when the asset managers who the IA represented threatened to quit the group if he wasn’t immediately sacked. They complained that he was making the association “more like a regulator than a trade body”.
There’s a whole world of things most of don’t know about the people who look after our pensions. Did you know that most actively managed funds – the default option that we generally get steered towards when we join company schemes – perform worse than funds that simply passively track the stock markets after fees are taken into account? That the investment “skill” we are paying for is more often than not losing us money?
Did you know that some managers of our pension funds are paid even better than the investment bankers with whom they are so cosy because their pay goes up automatically when the amount of money they manage rises (a process that often has little link to the fund’s performance)? Did you know that these asset managers are the people who are required to vote, on our behalf, on whether the bosses of the biggest companies in Britain are overpaid or not? Did you know that even more of the British public’s money is now set to flow passively to these asset managers because of the Government's “auto-enrolment” workplace pension legislation?
Did you know that the people who look after your pension fund had to be warned by the government’s financial regulator, the Financial Conduct Authority, earlier this month that they were spending too much money on taking independent financial advisers – the people on the high street who will normally advise you to take out a pension – to expensive golf trips and to international rugby matches and to other lavish corporate hospitality junkets? They were originally told to put a stop to this back in 2014 – but they’re still at it.
Did you know that the response of Justin Urquhart Stewart of Seven Investment Management to this warning was to say “I am saddened by the idea that we can no longer be hospitable to clients…soon we will be having a golf day without golf balls, a fishing day in the gym and we will be watching Formula One racing on the office television”?
If we’d watched Prime Minister’s questions last week we might have been given an inkling there was something amiss here. A Conservative MP called Tom Tugendhat raised the hidden pension fund fees. And the Prime Minister agreed with him. “I think one of the things that saps people’s enthusiasm for saving in investment products is just a sense that they do not understand the fees and charges,” David Cameron said.
But, be honest, you didn’t register any of that did you? Because no mainstream news outlet followed up on the Prime Minister’s words. Because the newspapers and broadcast bulletins were filled all week, instead, with a row about anti-Semitism in the Labour party. So much easier to understand, so much more entertaining, than the long, slow, pension rip-off, which will mean you will have a poorer retirement than necessary.
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