In a paper for the Fabian Society, Labour pensions shadow Gregg McClymont MP and his senior parliamentary assistant Andy Tarrant argue contract-based pension schemes contain an inherent conflict of interest between delivering for savers and meeting share-holders’ interests.
The Labour paper says it wants to extend fiduciary duty, which applies to those overseeing defined benefit pension schemes, to all of the industry. A fiduciary duty would mean that contract-based pension schemes will legally have to prioritise the interests of pension savers, rather than applying treating customers fairly principles but also taking shareholder interests into account, which is currently the case.
The paper argues because of the lack of a member advocate in the management of the scheme, there is a risk of being exposed to ‘provider capture’ where schemes become tied into the products and systems of the commercial pension provider. Whilst these may have been the right offerings at the time the scheme was established, they may not be so on an ongoing basis, they argue.
The report, which also calls for a lifting of restrictions on Nest, criticises inherent short-termism in asset management strategies that can lead to high levels of transaction cost. The paper cites Professor Kay’s Review of UK Equity Markets and Long-Term Decision-Making that argues trading rather than investment models of asset management are bad for savers because increased portfolio turnover leads to overall lower returns across the market as a whole and bad for British companies because it prioritises short-term financial results over the long-term sustainability of the companies in which they invest.
The paper describes the UK’s regulatory system for DC pensions as not fit for purpose and says the current pensions’ regulator’s name ‘belies its true status’ because it does not have sole responsibility for occupational pensions and it is inadequately empowered to conduct fully effective regulation.
McClymont and Tarrant’s paper is also highly critical of the lack of charge transparency, citing the case of researchers from the Royal Society of Arts’ Tomorrow’s Investor project who contacted 23 pension providers to obtain figures for their total costs, almost all of whom ‘misleadingly insisted that the only cost faced by the saver was the headline scheme AMC’.
The paper describes the Investment Managers Association’s publication of a voluntary code on charge transparency as a step forward, it says it contains such serious flaws as to be unfit for the purpose of delivering transparency as regards the costs of pension saving because it does not require firms to declare a single figure regarding historical transaction costs. Nor does it require a fund that invests in other funds to declare the accumulation of transaction costs, or require firms to combine transaction costs figures with the number of times a portfolio is turned over in a year. And as it is a voluntary code, not all funds will adhere to it, says McClymont.
Annuities could be better supplied to the market through a not-for-profit brokerage service that operates in the same way that Nest requires competing annuity providers to make sealed-bid offers for its annuitants, argue the paper’s authors.
McClymont says: “10 million people are being automatically enrolled into workplace pension saving for the first time. For the policy to be a success, every new saver must be offered a value for money pension. The Tory-led Government should act now to ensure that we all have the chance to save in to pensions people can trust.”
An IMA spokesman says: “The IMA’s enhanced disclosure guidance on costs and charges was the first step in our on-going efforts to provide additional information to investors, above and beyond the regulatory requirements.
“We are now working on a proposal to show, in pound and pence, the real costs that have been incurred by a single unit within a fund in relation to its performance over a full accounting year.
“We believe this is the best and simplest way to help investors understand the historic costs they have incurred.”I