Pension funds hide true cost to consumers

18 July 2012

  • 'Blind shopping' shows British customers misled on pension costs and charges
  • Small businesses not prepared for auto enrolment and risk being sold expensive products
  • Mis-selling scandal risk as consumer protections are removed
  • Simple low cost solutions exist elsewhere in Europe and should be introduced here

Purchasers of personal pensions are being misled about the level of hidden costs and charges, according to a report published by the RSA (Royal Society for the Encouragement of Arts Manufactures and Commerce).

Following a year-long investigation into the pensions industry, Seeing through the British Pension System found that 21 out of 23 providers denied there were any additional charges other than the annual management charge (AMC) and administration costs.

Written by David Pitt Watson, a leading pension fund manager and RSA researcher Harinder Mann, the report concludes there is a huge danger of inappropriate pensions being sold to unsuspecting customers.

The report uncovers how those selling pensions fail to reveal what is charged for such items as audit and custodial costs, and other hidden costs including taxes, stock lending fees and broking commissions.

Furthermore, even when costs are declared, it is not done in a way in which typical pension savers are likely to understand. The enormous impact of fees, where an extra 2 percent annual charge can, over the lifetime of a pension, result in a halving of pension benefit, is not understood by individual consumers or by small employers, the report concludes.

Commenting on the report, David Pitt Watson said:

"For markets to work effectively, consumers need to know what they are buying. It is extraordinary that, after so many years, such a system is not in place in this country. It is vital people have access to straightforward, accurate, high quality information. Our report provides simple, low cost suggestions which will benefit all pension suppliers who wish to succeed on the basis of the value of the products they sell. But more importantly, by providing this information, Britons can have greater confidence in the saving system, and enjoy better, higher pensions for less cost."

The report found that in Denmark, a full clear statement is provided to pension holders. It concludes that the same could, and indeed must be made available in Britain if the pension market is to work effectively. With auto-enrolment into pensions shortly to be introduced, the report warns that small businesses have little idea about which providers represent good value for money and that there is a huge danger that they will be sold expensive and inappropriate products.

The report notes that the DWP has inadvertently allowed the removal of consumer protections that presently cover workplace pensions – without which there is a real danger of these otherwise admirable reforms resulting in a mis-selling scandal.

The report recommends that pension funds learn from their European counterparts (in particular Denmark) who provide an annual statement (presented like a bank statement) which reconciles their investment savings. It also calls for the introduction of a 'statement before purchase' which shows the likely effect that fees will have on their pension outcome.

Commenting on the report, RSA researcher Harinder Mann said:

"Our research shows that customers simply do not understand the pensions they are buying, because they are being badly misled about the true nature of costs and charges. Under these circumstances, markets will fail; customers will buy bad products and good pension suppliers are likely to be replaced by bad ones. Yet simple systems exist to solve this problem, which are used in countries such as Denmark. Our report provides simple, low cost suggestions which would help Britons enjoy greater confidence in the saving system."

Seeing through the British Pension System follows a previous RSA report Building the consensus for a People's Pension in Britain (December 2010) which showed that:
  • A huge proportion of our pensions disappear in fees – with charges swallowing up to 40 percent of the value of the pension (over the pension's lifetime).
  • If a typical Dutch and a typical British person save the same amount for their pension, the Dutch person can expect a 50 percent higher income in retirement.
  • That minor changes to our regulatory framework could boost pension returns by 39 percent.

Read the report Seeing through the British Pension System