The surest sign of malign intention in financial dealings is a failure to be straightforward about the fees
Four years into the credit crunch, it has become mainstream to distinguish between the important functions of banking and those things that the Financial Services Authority chair, Adair Turner, brands as “socially useless”: activities that involve someone getting rich by fleecing someone else, and leaving the taxpayer to pick up the pieces. So far, however, the discussion has been around hedge funds and investment banks, not the less exotic intermediaries that we increasingly rely on to get us through old age.
That needs to change. The surest sign of malign intention in financial dealings is a failure to be straightforward about the fees. The pensions industry has a long and inglorious record here, reaching back to the great mis-selling scandals of a generation ago. We report that an industry working group set up to provide transparency is instead manoeuvring to keep investment costs hidden. Pensions do of course fulfil a useful function – insuring an individual’s finances against living too long. The miracle of modern medicine is converting this from a possibility into a probability, so we will need more such insurance. But people need to know exactly what they are paying for the service – and should not have to pay too much. Labour frontbencher Gregg McClymont is making the running simply by spelling out this obvious truth. As things stand, charges that sound reasonable on an annual basis can easily mount up to swallow a third or more of total savings over a lifetime. In such cases, it is not the saver but the sharp suits who effectively pocket the generous tax relief. The exchequer ends up taking a second hit where means-tested benefits are required to top up inadequate income. Such tales of publicly subsidised private profits very much fit with the wider picture of relations between the City and the nation.
As for the additional “services” that private pensions claim to provide, most are firmly in the “socially useless” box. Claims of superior investment performance rarely turn out to justify the higher fees involved. Marketing – to pull people’s heads out of the sand, and get them saving – used to be a worthwhile expense. But now that the government is, rightly, about to enrol every worker who does not opt out into a retirement plan, marketing is less necessary. Indeed, it might better be described as brainwashing. The pensions minister, Steve Webb, points out that scale economies are already driving down the average charge. But a lower average charge is of scant consolation to those individuals who will continue to get stung – and it does not take many horror stories to provoke fears and deter a much wider swath of the population from saving.
Mr Webb is pursuing what he calls “operation big fat pot”, the admirable aim of encouraging the consolidation of tiny pensions built up in short-term jobs, which in the best case result in extra charges and hassle, and in the worst case get entirely forgotten. But following frenetic industry lobbying, the government has just revealed that the consolidation will not be into a cut-price central fund, but will instead sweep a worker’s former pensions into his or her current employer’s scheme – whether it offers good or bad value. After the inexplicable recent removal of established charge caps, some savers could find themselves pouring even more into the charges black hole. For them, the direction of policy might be better characterised as operation big fat pit.
Having boldly established a not-for-profit savings trust to challenge the private sector, the Department for Work and Pensions now ensnares it in red tape to ensure it does not challenge too much. Such is the institutional capture that the latest capitulation over small pension pots was explained using opinion polling commissioned by the Association of British Insurers. Needless to say, biased questions were deployed. The long process of bringing the masters of the banking universe to heel is only beginning. In pensions, the equivalent operation is yet to start. For the sake of all our futures, it cannot happen soon enough.