28th May 2014
Readers of Mindful Money will be aware of the worrying lack of transparency around charges in the fund management industry. Pension journalist John Greenwood examines where we are now and sees some reasons for optimism.
We highlighted the depths of the problem we face understanding opaque investment charges on Mindful Money more than a year ago.
So it is good to see the Pensions Institute, the independent academic body that is part of Cass Business School, join our calls for greater transparency in the disclosure of fund management charges.
We know what the headline charges levied by fund managers are – these are set out in their marketing documentation, and described as the annual management charge (AMC). But it is the other costs, and yes there are many layers of them, that the Pensions Institute is concerned about. These costs relate to the buying and selling of shares on behalf of you, the investor. A report published by the Pensions Institute this week found that as much as 85 per cent of these transaction costs are concealed from the investor. As the Pensions Institute’s Professor David Blake puts it “There is little point in requiring transparency where the reported measure for ‘costs’ does not include all of the costs.”
Earlier this month the Financial Conduct Authority criticised the annual management charge (AMC) model as failing ‘to provide investors with a clear, combined figure for charges’. Instead, it recommended the use of an ongoing charges figure (OCF) which includes recurrent operational costs, such as keeping a register of investors, calculating the value of the fund’s units or shares, and asset custody costs.
The European Union took us back a few paces in 2012 when its Key Investor Information Document actually relaxed rules by no longer requiring fund managers to disclose their portfolio turnover rate – the rate at which the manager is turning over, or churning if you want to be pejorative, the shares in the fund. Portfolio turnover is significant because it is only when shares are bought and sold that many of these concealed costs are levied.
But the asset management industry is now moving in the right direction, with a four-stage plan to increase transparency. The first two stages, the adoption of the OCF and a new ‘pounds and pence’ per unit disclosure regime, that includes direct transaction costs, have just come into effect. Stage three involves figuring out how to account for indirect costs and how to accurately reflect portfolio turnover, while stage four involves disclosing how much of your money fund managers spend on research – money that you might reasonably have thought actually came out of the AMC you paid. These latter two stages are a work in progress, and you might be wondering why we need a four-stage process to get to the bottom of the true cost of investing. So do we – we will keep you posted.
– Part two –
It is not all doom and gloom for charges. In fact, while it has not yet quite got to grips with the under-the-bonnet charges that are vexing the Pensions Institute, the Government’s assault on pension providers costs’ is already having significant positive effects for consumers.
Pensions minister Steve Webb has ruled that charges for auto-enrolment pensions must be capped at 0.75 per cent. Just to be clear, that is not including those hidden charges the Pensions Institute is worried about, but significant nevertheless, as in some cases this will mean savers see their product charges halved as a result of his intervention.
Webb has also ordered an end to the practice of active member discounts, where former employees pay a higher charge than current employees. For example, some schemes charge 0.5 per cent a year of fund value to current employees and 1 per cent.
These changes sound tiny – fractions of a per cent of your fund each year – but they do add up over time. So much so that Scottish Widows is having to set aside £100m on its balance sheet to account for the revenue it will lose by implementing the charge cuts.
Aviva has just published its plans for implementing these changes. On active member discounts, the good news is that Aviva’s approach to getting rid of active member discounts is reducing charges pretty much across the board, even where the charge for former members of staff is already below the DWP’s new charge cap. So, for a scheme like the Aviva one offered by my employer, where current employees are charged a rock-bottom 0.3 per cent, and former employees pay a still reasonable 0.7 per cent, in future everyone will be charged 0.3 per cent.
Most other providers are yet to come out with their policy on active member discounts. Some will have doubtless been planning to split the difference and charge everyone in the scheme a rate somewhere between the current employee and former employee rate. For existing employees, that would see charges actually going up. Aviva’s move should put pressure on the others to do more for their customers.