Cheap pension fund

davholla

According to this article people in the UK pay a lot more than others for pensions.
I would like to invest with ATP or a cheaper company (I have just changed jobs).
Any ideas ?
[QUOTE
David Pitt-Watson says fees levied by Britain’s pensions system are blighting the retirement plans of millions of people, who are left with much less than overseas savers despite contributing just as much.

Mr Pitt Watson, a senior executive at Hermes Fund Managers, says that a range of little-known fees and levies typically wipe more than £100,000 off the value of a middle-class worker’s private pension.


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The total costs of some plans from high street names such as HSBC, Legal & General and Scottish Widows amount to more than £200,000 over 40 years for someone saving £200 a month.
“Our industry is not performing its function well,” said Mr Pitt-Watson, whose company oversees billions of pounds of savings. “It is terribly inefficient.”
Mr Pitt-Watson, who helps manage the country’s biggest pension scheme on behalf of BT, has decided to speak out after The Daily Telegraph disclosed that more than £7.3 billion is being skimmed off savers’ investments every year. The money is being deducted through a range of questionable levies and fees which are often not explicitly disclosed.
Many of the investment fund practices exposed by this newspaper on Saturday are also endemic among pension firms, Mr Pitt-Watson says, having a disastrous impact on Britons’ standard of living in retirement.
In an article for today’s Daily Telegraph, Mr Pitt-Watson says: “If a typical British and a typical Dutch person save the same amount of money for their pension, the Dutch person will end up with 50 per cent more income in their retirement than the Briton.
“There is no trick here. No special tax considerations. No clever investment strategies. It’s just that the Dutch have an efficient architecture for their savings. We do not.”
According to Mr Pitt-Watson, someone saving £1,000 a year throughout their working lives could expect to retire on an inflation-protected pension worth £16,080 a year if they did not pay fees.
However, the typical fees levied by British pension funds – which include several in addition to the “annual management charge” familiar to many investors – would reduce the payout to just £9,900 annually.
The Daily Telegraph has established that many popular pensions will be worth between a third and a half less for those retiring because of fees and practices. Although perfectly legal, they may be regarded as unfair for consumers.
A 25-year-old worker putting £200 a month into the HSBC World Selection Personal Pension for 40 years and receiving typical returns would be charged a total of £248,650, according to industry figures.
The worker would be left with only £248,453, according to the Financial Services Authority, meaning that just over half the pension pot would be absorbed by costs.
Legal and General’s Portfolio Pension would cost £209,000 in charges and deductions, while Scottish Widows’ Individual Personal Pension Plan would cost £160,000 of the £497,103 accumulated with a typically expected 7 per cent return.
By contrast, Scottish Life’s Pension Portfolio — one of the least costly, according to the FSA — would absorb only £83,138 in charges and deductions over 40 years.
Low-cost European pension providers are currently looking to establish themselves in Britain, but have told this newspaper they are facing widespread opposition from more established companies in this country.
ATP, a large Danish pension fund, has just opened an office in London, where it plans to develop its low-cost schemes for the UK market. It charges about 0.04 per cent a year to manage its fund – compared with 1.5 per cent or more in this country.
Morten Nilsson, ATP’s head of international operations, said they kept charges to “less than £5 per person every year” by slashing backroom costs.
“Cutting costs is key for us – we know that even half a per cent matters a huge amount to a pension fund over time,” Mr Nilsson said.
“In keeping costs low, scale is the most important element. But it is also about administration – we keep our processes simple.
“Most pension fund structures in the UK keep getting more and more complicated, and this means commercial funds are allowed to make more and more money.
“And we simply do not have many people working for us, which obviously reduces cost. We also don’t have a sales force like UK funds.”
Industry experts pointed to the costs incurred by many independent financial advisers, who receive large commissions for referring savers to pension funds and often receive “trail commission” every year from then on.
Dr Ros Altmann, a former Number 10 pensions adviser and governor of the London School of Economics, said the high levies had been hidden during the financial boom, but were now affecting pensions.
“If you are making a 15 per cent or 10 per cent return, 1.5 per cent can seem insignificant, but if you are only making a return of 3 per cent then it is hard to justify,” she said.
“People don’t seem to notice it, and it is so important. The other problem is that pensions are sold, not bought, and a salesman may have a reason for selling specific products, and not the best ones.”
The intervention by Mr Pitt-Watson, a well-known figure in the pensions industry, will put pressure on fund managers and the Government to clean up the industry.
Hermes is the country’s best funded pension company. It runs the BT pension scheme and also handles funds for dozens of other companies and government-backed schemes.
Mr Pitt-Watson, who was approached to be general secretary of the Labour Party under Gordon Brown, has held a number of senior positions at the firm.
Dwindling state pensions mean millions of Britons now rely on private pensions to fund several decades of their lives. More than seven million people now invest in pensions exposed to the stockmarket, five million through company schemes and two million with private plans. inflation-protected pension worth £16,080 a year if they did not pay fees.
However, the typical fees levied by British pension funds – which include several in addition to the “annual management charge” familiar to many investors – would reduce the payout to just £9,900 annually.
The Daily Telegraph has established that many popular pensions will be worth between a third and a half less for those retiring because of fees and practices. Although perfectly legal, they may be regarded as unfair for consumers.
A 25-year-old worker putting £200 a month into the HSBC World Selection Personal Pension for 40 years and receiving typical returns would be charged a total of £248,650, according to industry figures.
The worker would be left with only £248,453, according to the Financial Services Authority, meaning that just over half the pension pot would be absorbed by costs.
Legal and General’s Portfolio Pension would cost £209,000 in charges and deductions, while Scottish Widows’ Individual Personal Pension Plan would cost £160,000 of the £497,103 accumulated with a typically expected 7 per cent return.
By contrast, Scottish Life’s Pension Portfolio — one of the least costly, according to the FSA — would absorb only £83,138 in charges and deductions over 40 years.
Low-cost European pension providers are currently looking to establish themselves in Britain, but have told this newspaper they are facing widespread opposition from more established companies in this country.
ATP, a large Danish pension fund, has just opened an office in London where it plans to develop its low-cost schemes for the UK market. It charges about 0.04 per cent a year to manage its fund – compared with 1.5 per cent or more in this country.
Morten Nilsson, ATP’s head of international operations, said they kept charges to “less than £5 per person every year” by slashing backroom costs.
“Cutting costs is key for us – we know that even half a per cent matters a huge amount to a pension fund over time,” Mr Nilsson said.
He said they kept administration simple, did not have a sales force, and employed relatively few staff.
Dr Ros Altmann, a former Number 10 pensions adviser and governor of the London School of Economics, said the high levies in Britain had been hidden during the financial boom, but were now affecting pensions.
“If you are making a 15 per cent or 10 per cent return, 1.5 per cent can seem insignificant, but if you are only making a return of 3 per cent then it is hard to justify,” she said.

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http://www.telegraph.co.uk/finance/personalfinance/pensions/7921524/Charges-and-fees-cutting-50-per-cent-from-British-savers-pension-pots.html

dunstonh

According to this article people in the UK pay a lot more than others for pensions.

Only if they want to.

The research has been highlighted as being flawed on a number of fronts:

1 - Using a 1.5% figure when 1% has been the benchmark for nearly a decade here is misleading.
2 - The 1.5% figure includes cost of advice on individual pensions using managed funds and the provider/platform costs. They compared it against institutional tracker funds on corporate pensions without advice and without the cost of platform/provider and advice included (where that is charged separately there) Two different types of pension and service.

hugheskevi

I agree the research is flawed - in addition to the points above, I think the analysis assumes that the £200 per month contribution is held constant in cash terms, ie the contributions are front-loaded, to allow the 40 years of charges to accumulate.

It is far from clear to me what you would do about this anyhow, even if you agreed with the findings...it is all very well to say lets put in a completely different system, but it is rather harder in practice.

Perhaps you would cap all charges? That is quite an intrusion by regulators into a competitive marketplace, and some may well want higher charges, ie if they wish to hold complicated property within the pension, if they want to invest on stock exchanges other than domestically, etc.

If you didn't want to cap all charges, perhaps you could cap charges on particular types of pension...that has already been done with Stakeholder pensions.

Ultimately the problem is that those who are financially literate/aware will seek out products (or be advised) that are very competitive. But that isn't most people. As Stakeholder pensions have shown, pensions are sold, not bought, and there has to be margin included to sell the product and that costs money, which means charges.

The consequence of that may be to think that people should just be put into a pension whether they like it or not - that would be a way of taking out the premium to sell a pension...again, that is what the 2012 changes will do as everyone gets put into a basic, low charging pension which they can then choose to opt-out from.

And if you are so convinced that provision is so flawed as to necessite a huge regulatory intervention even larger than this, the Pension Commission showed that the lowest charge method to provide pensions is via State Pensions - so if you don't think the market works and significant change is needed, I would argue the natural answer is to seek higher State Pensions rather than even greater market intervention.

jamesd

hugheskevi, the trouble with the new system from 2012 is that the charges are already going to be higher than those charged in at least one of the fully private SIPPs, let alone a competitive personal pension. It looks likely that it'll fail to deliver on its low cost objective.

hugheskevi

hugheskevi, the trouble with the new system from 2012 is that the charges are already going to be higher than those charged in at least one of the fully private SIPPs, let alone a competitive personal pension. It looks likely that it'll fail to deliver on its low cost objective.

Agreed.

That is inevitable though when you have a pension scheme that must serve everyone, where the vast majority of pension pots are worth very little. How can that ever compete with schemes that can pick and choose high-value customers with big pension pots.

Which comes around to the problem that charges are inevitable, and we really should be thinking more about whether private pensions are suitable for lower income folk, or whether State pensions would be a better answer.

sherwood1

It would be interesting to know how the UK pension providers have performed over the last few years, according to ATP's own statistics they have delivered nearly 7% per year over the past 9 years. The advice and the additional charges for teh advice levied by UK pensions are poor value for money. The risk is on the pension holder all the time not the advisor or the management funds. I would prefer to see a product where the managment fees are higher but on profits not just a 1 or 2% flat fee for so called advice/management. I agree a small admin charge would be required as well but I think the advisers and funds management have had it too good for too long. I dont think ATP are up and running yet in the UK but I imagine they will have lots of interest when they do.

dunstonh

It would be interesting to know how the UK pension providers have performed over the last few years

Why? Pensions dont make or lose money. They are just container for the investments. A pension with investments in China over the last decade would have seen significant growth whereas a pension with investments in whatever has done badly would have seen poor growth.

according to ATP's own statistics they have delivered nearly 7% per year over the past 9 years.

The typical balanced managed fund which was the default fund of most providers for decades tends to come in around 7% a year after charges as a long term average. So, I wouldnt be surprised if that was fund they were using. Of course it doesnt mean anything if the person isnt in that fund.

The advice and the additional charges for teh advice levied by UK pensions are poor value for money.

What is reasonable then?

The risk is on the pension holder all the time not the advisor or the management funds.

As it should be. If you start asking for guarantees then the costs will go up as guarantees always cost money.

I would prefer to see a product where the managment fees are higher but on profits not just a 1 or 2% flat fee for so called advice/management.

So, in that case, pick investments within your pension that utilise funds with performance charges. Although I would counter that to say there is nothing to suggest that option is better financially for you.

I agree a small admin charge would be required as well but I think the advisers and funds management have had it too good for too long.

Given the number of companies that have had to close their doors over the years and the ever decreasing numbers of advisers all stating that its no longer possible to make a sufficient profit in the UK, its hard to see how you can consider things being too good.

Many would consider that the FSA is the primary reason for higher costs in the UK. It has been reported that the cost of UK regulation is about £3 in every £10 earned. I know from my accounts that the cost of compliance overall comes in close to that figure.

Also, you have to remember that any research that cant tell the difference between investment funds and the tax wrapper is going to be flawed from the start.