QuoteRevealed: how City fees are eating into our pensions
Traders' hidden charges leaving pensioners and savers worse off, Treasury warned
Highly paid City traders are depriving pensioners and savers of thousands of pounds through high management fees that are often hidden, according to leaked advice provided by consultants to the Treasury. The charges are spreading and are so steep that savers may find they get less back in retirement than they invested in savings accounts and pensions over their lifetimes.
If the size of the charges were to become widely known, the UK's "fragile savings culture may be permanently damaged", according to the warning presented to the Treasury last month.
The damning findings come at a time of growing anxiety that millions of Britons will not have enough money for their old age. They will also raise new questions about the prime minister's decision to veto a new EU treaty over his demands for greater protection for the City.
David Cameron has insisted that the financial sector is a vital national interest, yet the consultants brought into the Treasury claimed that the often unnecessary charges built up by traders are damaging potential economic growth.
A source who has seen the presentation told the Observer that the conclusion was fund managers had "lost sight" of their customers and that the government needed to act. The presentation suggested that the country's pensions black hole – unfunded public and private pension commitments – could be wiped out over time if costs could be reduced, a source said.
"They are so high that the industry is actually destroying value for the UK investor at least as fast as the stock market can create it," the source said. "The government's message is that you have to save for your retirement, but with the amount you will make it hardly makes it worthwhile if these costs are being taken out. And the highest cost of all are personnel costs, wages and bonuses."
Even publicly disclosed costs reveal that UK funds are in most cases more expensive to invest in than funds in France, Germany and the US, it is claimed.
Michelle Mitchell, charity director at Age UK, said the revelation was evidence that the government must urgently enhance protection for people who followed ministers' appeals to save for their retirement. She said: "Some parts of the pensions industry very clearly have a case to answer. In these challenging economic times it's essential that charges are as low and as transparent as possible."
The presentation revealed how savings and pension pots were being chipped away as they were moved around by traders. A simple stocks and shares Isa can be top-sliced up to 16 times as it is traded around, it was claimed.
And while this practice and the costs were not noticeable when the market was on the up, the economic downturn was highlighting how much was being taken.
The average equity fund manager makes explicit that they are charging about 1.5% a year of the sum invested for their services, but additional hidden expenses average 0.3% a year and trading costs cut a further 1.4% off an investment. And the situation is getting worse, according to the analysis, which found that charges had increased by 9% in the last decade. The presentation added: "If the trend of diminishing returns and increasing costs continues we could soon expect negative returns on average."
During the presentation, which was later shared with the Department for Work and Pensions, the point was illustrated by the example of a saver who made £70,000 in contributions between 1994 and 2009, only to see the £46,000 in profit from the rise in the value of the FTSE 100 being consumed in its entirety by the financial services industry.
The experts behind the advice, Dr Christopher Sier, a former consultant to investment managers, and David Norman, formerly chief executive of Credit Suisse Asset Management (UK), revealed that the £2.1 trillion assets under management in the UK attract a cost of £67.2bn a year – or the equivalent of 3.2% – with the greatest cost being wages and bonuses for traders and fund managers.
The 14-slide power-point presentation concluded that the industry needs to be more transparent so that savers could effectively shop around and the government should act to make it safe and wise to save.
Sier declined to comment on his conversations with the government when he was approached last week. "What the Treasury said to me and what I said to the Treasury I will leave to the presentation, because you have got hold of that," he said.
Gareth Thomas, the Labour MP for Harrow West, said he feared that the government was reluctant to clamp down on the City's extravagant charges and practices. He said: "Dithering, out-of-touch ministers don't seem to understand how high the stakes are, or have the will to act. If pension charges were brought down by even a small percentage millions even billions more would end up in people's pension pots helping the next generation of pensioners and the communities they live in to have a safer, more secure future."
Tomorrow George Osborne, the chancellor of the exchequer, will give his formal response to the Vickers report on future regulation of the banks. He is expected to welcome its findings, including the recommendation of ring-fencing high street banking from investment banking services, but with the latest consultation and the preparation of a white paper expected to take several months, bankers are likely to launch fresh attempts to get the government to change some of the recommendations.
The stat on someone saving £70k over 15 years is particularly worrying, especially as governments have been shifting emphasis to everyone having some form private savings in addition to the state pension. Hopefully now it's been leaked we'll get the whole presentation and some details to judge.
Why was it necessary to conduct a special investigation to find out the fees mutual fund managers are charging? Can't you just look at a prospectus?
Quote from: Admiral Yi on December 17, 2011, 05:40:01 PM
Why was it necessary to conduct a special investigation to find out the fees mutual fund managers are charging? Can't you just look at a prospectus?
From what I can see half of the fee is up-front the remainder is either hidden fees or trading costs. I don't know the details a prospectus would go into on that other half. I've no assets to manage, so I've never looked into it.
Edit: Got this from a comment to the Guardian article. But it looks like there's been public work on this before:
QuoteA huge proportion of our pensions disappear in fees – with charges swallowing up to 40 percent of the value of the pension.
If a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50 percent higher income in retirement.
http://www.thersa.org/about-us/media/press-releases/going-dutch-how-to-double-the-value-of-british-pensions
The fees are a disgrace.
The problem is that to get the tax relief you have to go through these people.
I'm finding that I get better returns by foregoing tax relief and investing the money in my own amateurish way.
I have a tip for Milliband, you could get more voters on your side if you removed this subsidy.
Quote from: Richard Hakluyt on December 17, 2011, 05:49:49 PM
I have a tip for Milliband, you could get more voters on your side if you removed this subsidy.
:lol: No he couldn't. He'd still be Ed Miliband.
Which is a shame.
Quote from: Sheilbh on December 17, 2011, 05:45:24 PM
QuoteA huge proportion of our pensions disappear in fees – with charges swallowing up to 40 percent of the value of the pension.
If a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50 percent higher income in retirement.
http://www.thersa.org/about-us/media/press-releases/going-dutch-how-to-double-the-value-of-british-pensions
Good thing Cameron saved you from the terrible continental financial regulations. :bowler:
Hmmm :hmm:
I watched PM's question time the other day, Milliband was so feeble he made Cameron look like a Giant of Statecraft.
Which is really rather sad if you put the welfare of the country above the welfare of a particular political party :(
1.4% of asset value in trading fees does seem outrageous. Are these guys flipping their entire portfolio daily?
I agree that mutual funds (which it sounds like these are) are abominations and I would never touch them except for the tax saving and the employer match.
I had a mutual fund. It worked out pretty well except that it was finite, but I don't blame that on the fund managers.
Quote from: Zanza on December 17, 2011, 05:56:42 PM
Good thing Cameron saved you from the terrible continental financial regulations. :bowler:
:lol: The saddest thing is he didn't even save us from that.
Quote
I watched PM's question time the other day, Milliband was so feeble he made Cameron look like a Giant of Statecraft.
Which is really rather sad if you put the welfare of the country above the welfare of a particular political party :(
Indeed. The saddest thing is there's no replacement really. You think the Tories are feeble when you hear that Osborne and Johnson are limbering up, then you look at Labour.
David Miliband is treated as the prince across the water. But watch any interview or speech with him and it's clear whey Ed was seen as the 'human' one. Aside from that you've got Ed Balls or Yvette Cooper (for my money the most potentially impressive).
It's odd. I always felt that it was a shame that Blair never faced a strong opposition leader. But even when Cameron took over it never seemed that there was a strong, able leader. He was more credible because Labour were running out of steam than because he was able to make an impact. I hope the same doesn't happen again. Government by credible buggin's turn leaders of the opposition running against exhausted incumbents isn't ideal.
I always think that we were very unfortunate that the Tories won the 1992 election. They were utterly exhausted and staggered on for another 5 years becoming ever more bereft of ideas and moral standing. Then Blair came in and had it all his own way far too much, in truth Gordon Brown should have got the salary for being head of the opposition during those years. Blair's government would have been more successful with a credible opposition in place, without it the bad ideas got through as well as the good (with GB doing well by keeping us out of the Euro).
Moving back on topic. If you want to have a pension when you get old, I suggest you buy the FT guide to investing and start learning how the markets work, you can then start making your own investments on your own behalf. Given the fees charged by the financial firms it should not prove too difficult to beat their rate of return. There is also the added satisfaction of not contributing to the over-inflated salaries common in that sector.
If I start investing on my own behalf, however, don't I lose the tax break and the company matching of pension contributions?
Quote from: Warspite on December 18, 2011, 07:00:14 AM
If I start investing on my own behalf, however, don't I lose the tax break and the company matching of pension contributions?
You can protect it in a ISA if you are saving less than £11k or so a year. If the company is matching your contributions then you should stick with them of course.
Quote from: Richard Hakluyt on December 18, 2011, 07:11:38 AM
Quote from: Warspite on December 18, 2011, 07:00:14 AM
If I start investing on my own behalf, however, don't I lose the tax break and the company matching of pension contributions?
You can protect it in a ISA if you are saving less than £11k or so a year. If the company is matching your contributions then you should stick with them of course.
don't ISAs offer horrendous returns? I use mine merely for keeping money separate to my current account; my actual investments are elsewhere, as even with tax they offer a superior return to an ISA.
The sooner all you monkeys come to the realization that the vast majority of you will be working until you die, the sooner your sphincter will relax and the better off you'll be able to handle the ass fucking from Wall Street.
I'm looking forward to that actually. :cool: As soon as people retire, they turn into drooling old zombies who spend half the day worrying about why they're constipated, and the other half mindlessly watching Live! with Kelly. :bleeding:
I'm blowing my brains out promptly at 65.*
*Maybe 70. I dunno.
I wish more useless old people would do that. The cost of health care would plummet in that case. :)
Quote from: Caliga on December 18, 2011, 08:33:09 AM
I wish more useless old people would do that. The cost of health care would plummet in that case. :)
No shit. And it would help traffic move faster.
Quote from: Caliga on December 18, 2011, 08:28:09 AM
I'm looking forward to that actually. :cool: As soon as people retire, they turn into drooling old zombies who spend half the day worrying about why they're constipated, and the other half mindlessly watching Live! with Kelly. :bleeding:
Constipation...check
Live with Kelly... No fucking way. I watch CNBC at 9am. :)
Quote from: Warspite on December 18, 2011, 08:23:11 AM
Quote from: Richard Hakluyt on December 18, 2011, 07:11:38 AM
Quote from: Warspite on December 18, 2011, 07:00:14 AM
If I start investing on my own behalf, however, don't I lose the tax break and the company matching of pension contributions?
You can protect it in a ISA if you are saving less than £11k or so a year. If the company is matching your contributions then you should stick with them of course.
don't ISAs offer horrendous returns? I use mine merely for keeping money separate to my current account; my actual investments are elsewhere, as even with tax they offer a superior return to an ISA.
You can arrange to choose your investments within an ISA envelope. Like here http://www.money.co.uk/savings-accounts/savings-account-details/Halifax/Share-Dealing-Self-Select-ISA.htm
But, I notice the charges are higher than a simple sharedealing account..............for no particular reason that I am aware of :hmm:
I'm as much a supporter of capitalism as your next selfish git, but I do believe that the system unfairly benefits the financial services industry, it seems to get the tax breaks you need to use their overpriced services.....ie the tax breaks are more of a subisidy for them than a real tax break for us.
Quote from: Richard Hakluyt on December 18, 2011, 10:44:54 AM
But, I notice the charges are higher than a simple sharedealing account..............for no particular reason that I am aware of :hmm:
I'm as much a supporter of capitalism as your next selfish git, but I do believe that the system unfairly benefits the financial services industry, it seems to get the tax breaks you need to use their overpriced services.....ie the tax breaks are more of a subisidy for them than a real tax break for us.
What intrigues me is that, despite supposedly hosting an advanced financial sector with lots of competing firms, rather than the fruits of competition we get opaque products, hidden fees, and a worse return than a number of our European neighbours.
Clearly the best pension plan is to have a lot of kids.
Quote from: Caliga on December 18, 2011, 08:33:09 AM
I wish more useless old people would do that. The cost of health care would plummet in that case. :)
I'd be out of a job. :mad:
Quote from: Warspite on December 18, 2011, 10:48:10 AM
What intrigues me is that, despite supposedly hosting an advanced financial sector with lots of competing firms, rather than the fruits of competition we get opaque products, hidden fees, and a worse return than a number of our European neighbours.
I'm sure there's plenty of competition at the advanced end of the financial sector. But in terms of consumer products I think our financial services are more oligopolistic than in the US or most continental countries.
Quote from: Admiral Yi on December 17, 2011, 06:02:23 PM
1.4% of asset value in trading fees does seem outrageous. Are these guys flipping their entire portfolio daily?
I agree that mutual funds (which it sounds like these are) are abominations and I would never touch them except for the tax saving and the employer match.
If you choose your fund wisely, it's easy to avoid the high expense rates for mutual funds. Lots of no-load funds out there. Dinosaur pensions, you're SOL.
So I was puttering around on ETrade looking for overseas commissions, and noticed that in the UK any stock purchase is assessed a 0.5% stamp duty, which explains at least in part the trading fees y'all's investments funds are charging customers.
Quote from: CountDeMoney on December 18, 2011, 08:31:01 AM
I'm blowing my brains out promptly at 65.*
*Maybe 70. I dunno.
Spend your pension on 20 year old hookers. much more fullfilling ;)
Quote from: Caliga on December 18, 2011, 08:33:09 AM
I wish more useless old people would do that. The cost of health care would plummet in that case. :)
I miss Obamacare's death panels. :(
The Telegraph returned to the issue today:
QuoteFees that can halve the value of your pension
Millions of savers are being misled by City fund managers about hidden fees that can almost halve the value of their pensions, a year-long study has found.
By Robert Winnett, Political Editor
9:44PM BST 17 Jul 2012231 Comments
Nine in 10 of the country's biggest pension fund managers fail to warn people about the levies, which typically wipe more than £100,000 from the value of a middle-class worker's pension.
The report by the RSA, a think tank, found that workers were routinely denied simple, low-cost pensions that are readily available elsewhere in Europe. Ministers said they were prepared to intervene unless pension funds reduced their fees and became more transparent.
The research was published as official figures showed that 11 million people were failing to put enough money into pensions, which will leave them struggling in their retirement. Many people have abandoned pensions entirely following a decade of negligible investment returns from their savings.
The Government hopes to resolve the retirement crisis by "auto-enrolling" workers into pensions from later this year, which had led to growing concerns that millions more people could be "ripped off".
Steve Webb, the pensions minister, said: "Charges are reducing and we expect them to go down even further now that other players are entering the market. If this does not happen however we have the power to act and we will."
Ed Miliband, the Labour leader, has called for pension fees to be capped.
The RSA report found that 21 of the 23 pension funds surveyed failed to inform people about the charges.
David Pitt Watson, one of the biggest company pension fund managers and the author of the report, said the scale of the hidden levies was "extraordinary".
"For markets to work effectively, consumers need to know what they are buying," he said. "It is extraordinary that, after so many years, such a system is not in place in this country. It is vital that people have access to straightforward, accurate, high-quality information."
The report said pension charges accounted for up to 40 per cent of typical retirement savings.
Several international pension funds offer cheaper, more transparent deals elsewhere in Europe while charging British customers more. The average Dutch person can expect a pension worth 50 per cent more than their British equivalent because the country has far simpler charges.
The Daily Telegraph previously disclosed that an investor putting £50,000 into a fund providing typical returns over 25 years would lose £108,000 because of unnecessary charges.
Mr Pitt Watson said pension firms should provide their customers with simple statements setting out in "pounds and pence" how much they are losing in charges. He said small differences in the percentages levied by pension funds made a "vast difference" to people's pensions.
"These charges really matter," he said. "It's not difficult to sort out and should be addressed as a matter of urgency."
Last year, the pension industry pledged to introduce a new code of conduct setting out plans for greater transparency, but today's report undermines claims that the issue is being addressed.
Otto Thoresen, the director-general of the Association of British Insurers, said: "We agree it is desirable that pension costs become more transparent overall, and are keen to look at ideas which make it easier for employees to understand their pensions."
The issue of charges is increasingly important for millions of workers who now have to make their own pension provision. The number of people contributing to personal pensions fell by 400,000 to six million people between 2008 and 2010.
The proportion of people in a workplace pension has fallen below half for the first time in at least 15 years. Just 48 per cent of employees were in a scheme, compared with 55 per cent when records began in 1997. The number of people in the private sector with pensions linked to their final salary has fallen from almost a third of workers in 1997 to 9 per cent.
Mr Webb said: "This is a very large group of people who will face a big drop in their living standards on retirement if they do not take action now.
"And this is not just a problem for those on lower wages — those on higher incomes are just as much at risk of having a lower standard of living in retirement if they do not take this seriously.
"We have to make it easy for people to save, in confidence, knowing that they are putting enough away to have a comfortable retirement."
Joanne Segars, chief executive of the National Association of Pension Funds, said: "The private sector is going through a huge shift in its staff pensions, and even more change is on the way. The main thing is to get more people saving into some form of pension. The UK isn't putting enough away for its retirement."
Britons saving for retirement are also being hit by record low interest rates and the Bank of England's policy of printing money to stimulate the economy. This drives down annuity rates on which most pensions are based. Somebody retiring with £100,000 in July 2008 would have been able to secure an annual income of £7,855. Today, that figure is £5,743.
When they say "customers" are they talking about employers trying to set up pensions for their employees? It sounds like they mean individuals in parts.
Quote from: MadImmortalMan on July 17, 2012, 09:22:56 PM
When they say "customers" are they talking about employers trying to set up pensions for their employees? It sounds like they mean individuals in parts.
I think both. Many people have a workplace pension - but less than half now given the dreadful returns over the last few years - but a lot of people (6 million) also have a private pension of their own.
Quote from: Sheilbh on July 17, 2012, 09:33:24 PM
Quote from: MadImmortalMan on July 17, 2012, 09:22:56 PM
When they say "customers" are they talking about employers trying to set up pensions for their employees? It sounds like they mean individuals in parts.
I think both. Many people have a workplace pension - but less than half now given the dreadful returns over the last few years - but a lot of people (6 million) also have a private pension of their own.
Are the private ones actually pensions (defined benefit) or are they just retirement investment accounts? I'm trying to figure out if there is a language difference here.
Almost no pensions here are defined benefit. There's a couple of big employer schemes (like the BBC) that are but they're almost all closed. The overwhelming majority of workplace and private pensions are defined contribution.
Quote from: Richard Hakluyt on December 18, 2011, 07:11:38 AM
Quote from: Warspite on December 18, 2011, 07:00:14 AM
If I start investing on my own behalf, however, don't I lose the tax break and the company matching of pension contributions?
You can protect it in a ISA if you are saving less than £11k or so a year. If the company is matching your contributions then you should stick with them of course.
But the big tax break is that you don't pay income tax on the money you put into a pension. If you pay 40% on that income, tyou get an immediate, upfront 67% return on you investment. An ISA can't give you that since you are using post-taxed income.