The Government is “complacent” about cost transparency failings in pensions industry and funds should be obliged to disclose costs in a uniform template, according to a report from the Work and Pensions Committee pubished today.
The committee also uses the report to reiterate a call for a 0.75 per cent cap from the outset on FCA decumulation pathways, highlight the plight of the mainly female low earners missing out on tax relief through net pay schemes and raise concerns about the number of staff at the FCA tackling scams.
The Work and Pensions Committee report says it is “unconvinced” that the industry will rise to the challenge of providing clear, transparent information to pension schemes about the costs and charges of investments. It says “Government and regulators should not wait for the industry to fail to act voluntarily as they have so many times in the past”, and should instead move now to legislate for mandatory disclosure to a set format, for both defined contribution and defined benefit schemes.
Compliance with the new mandatory disclosure regime should be overseen by the relevant regulators, says the committee, who should be given any additional powers they might need to tackle non-compliance. The information provided should be available for scheme members as part of the wider information on value for money, as well as information on exit charges and any other costs associated with transfer of their pot. The FCA should explore the creation of a public register of asset managers’ record of compliance with reasonable data requests.
The inquiry found that some trustees are making investment decisions when they don’t know the true scale of the costs that they are incurring. The report accuses asset managers of unwillingness to disclose all the explicit and implicit costs attached to each investment. The report says “it is near impossible for investors to figure out how much their investments are costing them because additional costs are hidden and too high”.
The report notes that for individuals, the charge cap of 0.75 per cent on defined contribution pension schemes used for automatic enrolment does not appear to have caused charges to rise to the level at which it was set, with average charges being between 0.38 and 0.54 per cent depending on the scheme type. But the report notes that not all charges are covered by the cap, and the full extent of charges outside the cap is not known, making it impossible to know how well the cap is working in practice.
The report also notes that the permitted combination of a flat fee plus a percentage of funds under management charge has the potential to completely erode small dormant investment pots. It argues that this could cause many savers’ confidence in automatic enrolment to be fatally undermined.
MPs have called on the DWP to review the level and scope of the charge cap, as well as permitted charging structures, in 2020. The review should consider preventing flat fee charging structures being applied to dormant pension pots and revisit measures to proactively consolidate smaller pots, says the report.
The committee says that contrary to the two responsible ministers’ “complacent” assessments in evidence, it is unconvinced that any part of the industry scores above half marks on transparency.
The committee has also expressed concern that the FCA’s dedicated scams team only consisted of approximately 10 people, out of 3,700 FCA staff. The FCA should review whether it dedicates sufficient resource to combat active pension scams, prevent new pension scams and protect individuals, it says.
The report also calls on theGovernment to publish a timetable, by the end of this year, for the rollout of a non-commercial pensions dashboard. This should include key milestones, such as the date for pension providers to include their data on the pensions dashboard, as well as target timescales for phases beyond the initial launch—for example, longer term plans to enable consumers to make value for money comparisons through the pensions dashboard. The pensions dashboard should also feature retirement income targets to ensure the information is meaningful to its users.
Rt Hon Frank Field MP, chair of the committee, says: “Ripping off pension savers could be eliminated. The select committee is calling on the Government to shine the searchlights into that part of the financial industry that has settled down to misinforming, mischarging, overcharging and making a fat living off the hard-earned savings of pensioners. Government and regulators should not wait for the industry to fail to act voluntarily as they have so many times in the past. It must put the full force of the law behind such changes.”
Transparency Task Force founder Andy Agathangelou says: “We wholeheartedly welcome today’s first class analysis and report by the Work and Pensions Committee, which calls for exactly the kind of effective cost disclosure framework that will empower pension savers and those that represent their interests to shop wisely. I can’t think of any reason why any right-minded stakeholder; be they a politician, policymaker, regulator, market participant, trade body or professional association would not actively support the Committee’s well-considered recommendations; and do all they can to introduce all the recommended changes without any delay. Any delay will literally cost the pensions-savings public their hard-earned money and further jeopardise the reputational integrity of the pensions sector.
“To my mind, the single most important recommendation the Work and Pensions Committee is making is to replace the idea of a voluntary cost disclosure framework with a mandatory one. This must make sense because there are many advantages in creating a level playing field; everybody that likes free markets should see that. Leaving it to individual companies to decide whether to disclose costs properly or not is as daft as the idea of leaving it entirely to the discretion of car drivers to stick to the speed limits, or not. We don’t want carnage on our roads and we don’t want mass pensioner poverty either.
“I’m curious to now see if any stakeholder is going to be silly enough to not actively and authentically get behind recommendations that have been created purely to look after the interests of the UK’s pensions-saving public.”
Cost Transparency Initiative chair Mel Duffield says: “The Work and Pensions Select Committee’s support for the disclosure templates developed by the Cost Transparency Initiative is very welcome. However, we are disappointed that the Committee’s report fails to recognise the strong engagement between industry, regulators and Government in adopting the work of the Cost Transparency Initiative.
“Just two months after the launch of the templates, the level of detail in the technical queries the Cost Transparency Initiative has been receiving from investment managers demonstrates the already high level of engagement and take-up by industry.
“The FCA, TPR and Government Ministers have all provided welcome drive and direction, sending very clear messages to the industry about their expectations. We are confident this will help to ensure the success of the Cost Transparency Initiative.”
The report says the Government should urgently resolve the discrepancy between ‘net pay’ and ‘relief at source’ tax relief.
Baroness Altmann says: “MPs have once again demanded the net pay scandal be resolved urgently – but Government seems in denial.
“When it comes to pensions, most workers are at the mercy of their employer’s choice of pension scheme. However, employers are also often unable to compare the costs of different schemes and whether they represent good value for money. A classic example of this is the use of net pay pension arrangements by employers who have lower-paid staff. Over 1.5 million workers, who earn less than £12,500 a year, are being forced to pay the equivalent of a 25 per cent ‘penalty charge’ in their employers’ auto-enrolment pension scheme. Most small businesses and their staff cannot be expected to understand the complexities of tax relief and pensions administration, but this is creating a major social injustice affecting the lowest earners in the country.
“Most of those affected will be women, working part-time, and the Committee is rightly calling on the Government to remedy this injustice urgently. I am working with an Industry Group which has developed practical proposals to ensure these low earners can recoup the excess costs they are being forced, unknowingly, to pay. Let’s hope the Government acts quickly to remedy this injustice.”