Governments must act on pensions and pensions providers

In a recent entry into the pensions debate by the Prince of Wales (actually a while ago, but the topic is still hot), he suggested that the pensions industry needs to mend its ways.  Pension saving is a long term process and needs to be addressed a such, so rewards to managers should be linked to long term performance, not to short-term trading. But incentives to individual investment managers is only half the story.  There are two other areas that need reforming:

1.  Financial management fees need to be reduced and linked to performance. 
Current fee levels make a significant hole in the value of investments and in for some they are so high that they inhibit people from even bothering to save.  Cash returns at the moment are so small that the real return to savers is negative, the extent of this being largely a function of the margins that providers make for themselves (Banks claiming they have to squeeze their savers, but not their bonuses, in order to rebuild their reserves).  And in the case of unit trust and other simple equity investments, many do no more than track the market and of those that do not many underperform.  They then all deduct their costs of course whether they performed well or not.  It is as though the benefits of ISA tax breaks go to the providers rather than to savers. 

Some argue that we should rely on the market to introduce efficiency.  But financial services do not operate in an open and competitive market.  They are opaque and invariably provided through multiple layers (marketing companies, consolidators or platforms, investment companies, back office service providers, etc..etc…).  All take their  fees.   It is very difficult, impossible for retail customers, to really know what it is costing them.  This opacity suits the City who continue to reap enormous profits
The Retail Distribution Review claimed to address this.  From a Deloitte’s website:

“The Retail Distribution Review (RDR) aims to drive structural change throughout the retail investments industry, in order to give consumers confidence that the advice they are given, and products they are sold, are best suited to their needs”

“The changes required as a result of the RDR are likely to have wide reaching impacts across organisations. Strategic responses will vary significantly in the degree of change involved, but all require significant changes to business and technology operations”.

For pension funds, at least there are now proposals to limit returns, but 0.75% is still to high (the Dutch have limited returns to 0.6% for years).  It is surprising, and heartening, to find one provider (L&G) actually arguing it should be reduced to 0.5%.  This But this only applies to pension funds and not to self-investment where fees somehow seem to be stuck, at up to 3%, at the levels they were before the RDR.  

Notwithstanding the RDR I challenge most private savers using professional advisors to work out how much their savings is actually costing then.  And unlike pension funds who can set up competitive tendering to drive prices down, it is impossible for private individuals to significantly influence costs.  The amount that the professionals cream off significantly impacts on savings.  Furthermore up-front percentage fees have survived the RDR, which means that any change in provider in the short term can work out very expensive indeed.  Surely there is a case for limiting the overall cost to retail investors as well.

   

2.  People need to be encouraged to put the long-term ahead of the short term
For most people spending now is preferable to saving for the future.  For the majority of people struggling to pay bills today, this is a necessity but unfortunately a great many people simply value spending today more than saving for the future.  Perhaps for the young who have jobs, the prospect of buying a home of their own, or enjoying a long happy retirement seems so remote that savings seem pointless.  Yet if they don’t start when they are young it certainly will be. 

So we need compulsory savings or pension scheme.  It does not matter much in the longer term whether this is from employees or from employers as they both costs to an enterprise, or for the self-employed.  Furthermore, sacrificing consumption today in order to pay for future potential liabilities (pension) is altruism, of sorts, with considerable long-term benefit for the Government finances, so pension funds should be given back the tax-free status that they were robbed of by Gordon Brown.  Reasonable limits on the level of tax free tax free saving would surely ensure that this was not just a tax-avoidance loophole for the very rich..
Of course real changes would require the Government to have a really long term horizon.

But that would require a miracle, wouldn't it?

Have a nice day!