Last week the government launched a self proclaimed “full frontal attack” on rip-off pensions. But from where I'm standing it looks more like the pensions minister popped a plaster over the gaping wounds in UK company pension schemes.
Our pensions are bleeding so much money that even workers who've saved throughout their entire career could face an "exceptionally miserable" future, as Prince Charles warned the nation earlier this month.
So how does the government propose to prevent us all coming to a sticky financial end? It wants to cap the annual management fees that pension funds charge to look after our money at 0.75 per cent. Currently some schemes charge up to 2.1 per cent a year, but the median fees lie somewhere around the proposed ceiling.
To the average Joe these charges look tiny. But losing even a penny out of every pound is painfully destructive. Even small charges weaken the effect of your investments compounding and over the course of your working life will bite huge chunks out of your retirement fund.
Someone who saves £100 a month over a typical working lifetime of 46 years could lose almost £170,000 from their pension pot with a 1 per cent charge and over £230,000 with a 1.5 per cent charge, according to the Department for Work and Pensions.
A pension saver with a 0.75 per cent annual charge on their pension pot could eventually end up £100,000 better off than if they had been charged a rate of 1.5 per cent, the government said.
Why cream-offs this greedy were ever allowed in the first place is baffling. Especially given that even decent pension funds can be run on a shoestring - not least because they have huge economies of scale, but because many of them flog second-rate funds.
A combination of decent funds and lower fees rather than duff funds and rip-off fees could mean the difference between comfort and poverty in retirement for millions of people.
But as a single policy, a cap on annual management charges (AMCs) will be nowhere near enough to heal our pensions back to good health.
It must be the first in a string of pension crackdowns if the government is serious about securing our financial future.
For example, hidden fees still lurking beneath the surface of our pensions are just as detrimental as the highest AMCs. From bid offer spreads, to research costs, and the silent short trades of fund managers desperate to hit their annual bonus targets, they gobble hundreds of thousands of our hard earned pounds and urgently need full disclosure.
Even more important are the investments themselves. Billions of pounds of our savings are being funnelled into underperforming funds, and millions of us have our money in funds that are unsuitable for our age and risk profile. Bestinvest recently identified 113 pension funds, with combined assets totalling approximately £31bn, that have consistently underperformed. Its Spot the Dog Pension Edition report names a set of 40 funds in four major Association of British Insurers (ABI) pension fund sectors that Bestinvest dubs the “Long-term laggards”.
If not all pension funds will serve us with decent funds off their own back, then perhaps the government should force them to?
Take confidence from the government’s pension cap, but save that sigh of relief for later. Do everything in your power to show your company and the government that you care. And with any luck, this will be the first nail in the coffin of the practices making our pensions so desperately anaemic.
Take action: Is your company pension in good health?
Don’t just sit back and wait for the government to sort out your pension. There are some simple steps you can take now to check if your company pension is good value for money. And if you lift the lid and get a nasty surprise, we show you what to do:
Phone up or write to your pension fund and ask them:
1. What annual management fee are you paying? The new proposed cap is at 0.75 per cent but some funds are worth paying more for than others, so don’t just use this as a benchmark. For passive funds designed to track an index more than 0.5 per cent a year looks expensive. And for actively managed funds designed to beat an index, more than 1 per cent is probably over the odds to be paying a year.
2. Which ABI pension sector is your fund in? Matthew Browne, regional director at pensions advisers Broadstone, suggests comparing your fund with similar ones to see if it’s doing well or not. Once you know which fund you’re in, ask which ‘ABI Pension Sector’ it’s in. Then go on Trustnet.com and do a performance comparison over 1, 3 and 5 years. "Remember the performance you see might not relate to the fees you’re paying though - as some employers charge differently for the same funds and this affects your returns," he says.
3. If you are unhappy with what you find then make your voice heard. If you’re a director or senior manager within your company then use your influence to demand a better deal for you and your colleagues. And if that doesn’t work then tell your local MP or write to Steve Webb, the pensions minister.
If you don't like the fund your employer has automatically selected for you, have a look at the other options available within your scheme and think about switching. See our guide, Don't let your company pension dim your retirement, for some tips on how to get started.
