Hidden charges weigh pension pots down

The findings were revealed on Monday, days after Andy Haldane, chief economist of the Bank of England, said the UK pensions system is so complicated that even he found it confusing.

Pension pots are exposed to fees including bank set-up costs, tax advice fees, transaction charges and fund administration, legal, compliance and governance fees, according to the TTF.

Up to 25 pension industry professionals, academics and legal experts collaborated over a year to produce the report.

Researchers itemised the individual charges absorbed by a pension from when it is opened through to when the policy is wound up, often decades later.

Andy Agathangelou, chair of the TTF, said: “There are far more little bits of charges that are taken from people’s pension funds than originally thought, and some of these are implicit charges, which are difficult to identify and obtain."

He added: “Also a great deal of anecdotal evidence suggested that when trustee boards and investment governance committees request information, they very often struggle to obtain the investment information that they request, especially on costs and charges."

The number and types of charges are so complex, said Agathangelou, that it is virtually impossible for consumers to make like-for-like comparisons, prohibiting good market behaviour. 

The TTF is calling for all consumer-orientated market participants to encourage the regulators to introduce a duty of care, whereby customers’ interests are put before the commercial interest of suppliers to the market. 

The organisation will be submitting its final document to the Financial Conduct Authority and the Department for Work and Pensions next month.

Comparing apples with apples

Alan Smith, one of the founders of First Actuarial, said the charges made by fund managers have come under the spotlight in recent years; for example, with auto-enrolment, caps on charges protect people, he said, but added that the difficulty was there are still a few charges that are not included within that cap.

“What TTF are trying to do is come up with an industry standard so you can compare fund managers, so apples to apples rather than apples to oranges, which is not always as easy as people think,” he said.

Smith cited as an example that transaction costs might not be known until after the event, depending on how much trading there is within the fund. 

“The challenge is to come up with a measure that is consistent and can be applied across different funds,” he said.

In his 2014 report ‘On the Disclosure of the Costs of Investment Management’, David Blake from the Pensions Institute noted that no good reasons have been put forward for why all the costs of investment management, both visible and hidden, should not ultimately be fully disclosed.

What the regulator says

According to the Pensions Regulator, the law requires member-borne costs and charges across all arrangements within relevant schemes to be disclosed in the annual chair’s statement.

This includes transaction costs, and where trustee boards have not been able to obtain information about transaction costs, the law also requires the chair’s statement to indicate the information they have been unable to obtain and explain what steps are being taken to obtain the information in future.

A spokesperson for the regulator said it acknowledges that the way costs and charges are currently disclosed can make it difficult for trustees or members to undertake meaningful comparisons of the member-borne costs of services used by pension schemes or of investment products generally.

But, the spokesperson added, the FCA is looking at the ease with which trustees can undertake value-for-money assessments of investment propositions. “Disclosure is improving, and we continue to work with government and the FCA in this area.”