UK Parliament’s Work and Pensions Committee said it is “not convinced” that the pensions industry is willing to voluntarily provide clear, transparent information to pension plans about the costs and charges of investments.
“Ripping off pension savers could be eliminated,” MP Frank Field, chair of the committee, said in a statement. “The select committee is calling on the government to shine the searchlights into that part of the financial industry that has settled down to misinforming, mischarging, overcharging, and making a fat living off the hard-earned savings of pensioners.”
In a scathing report, the committee said it is up to the legislators and regulators to keep the industry honest as it can’t be counted on to police itself.
“The government and regulators should not wait for the industry to fail to act voluntarily as they have so many times in the past,” said the report.
The committee placed a lot of the blame on the lack of fee transparency on pension plan trustees. The report said that there is “evidence that some trustees are making investment decisions without a clear understanding of how much those decisions cost,” adding that the committee was “not convinced that there are sufficient incentives to achieve a high take up through voluntary disclosure alone.”
The report cited Anna Tilba, an associate professor in strategy and governance at Durham University Business School, who said that trustees’ lack of understanding of operating costs of pension funds are eroding future retirement incomes, as are inefficiencies in pension fund governance.
“This is coupled with asset managers’ unwillingness to disclose all the explicit and implicit costs attached to each investment,” said Tilba in the report. “Yet, it is near impossible for investors to figure out how much their investments are costing them because additional costs are hidden and too high.”
Colin Meech, a national officer for UK trade union UNISON, provided an eye-opening example of the difficulties pension plans have had in identifying fees and costs. He said that in the Netherlands, a template is used across the industry to identify pension costs. When Meech asked five investment managers to complete similar cost templates like the ones used in the Netherlands, they balked.
Meech said the investment managers questioned the importance of knowing the costs as they insisted it was only the performance that matters. Of the five managers, three took nearly a year to complete the templates, and the other two flat-out refused to complete the task.
But Meech said that not all the fee ignorance was willful, as many plans are simply unaware of their costs. He cited the West Midlands Local Authority plan, which volunteered to run a template spreadsheet to collect data on costs. The plan had a £12 billion fund and reported £10 million in asset management fees. However, after filling out the template, the plan discovered it had underreported the total cost by a whopping £82 million and had to restate the costs as £92 million from £10 million.