Charges, pensions and cynics
“What is a cynic? A man who knows the price of everything and the value of nothing.”
I was reminded of this Oscar Wilde quotation as I read through the findings of some research by fund manager David Pitt-Watson, looking a the impact of charges and fees on pension income in retirement.
The headline findings of this study were that British savers are retiring with pension pots worth half that of some of their European counterparts. This is despite them having invested the same amount of money.
Pitt-Watson puts this down to the fees and charges levied on the British pension system. He points to a large Danish pension fund which only charges 0.04% a year to manage its pension fund. This is compared to 1.5% or more in the UK.
Let me be clear about my position on this topic. I think the debate about investment charges has become a distraction from the real issues.
Debates on this subject often fail to compare like with like. In this example, charges at the level of the Danish pension scheme simply do not exist in the UK market. If they did, it would be fairer to make such a comparison.
What debates like this often neglect to discuss is the alternative. Assuming you agree that UK pension (and investment) funds are ‘expensive’, then you need to carefully consider the alternative to using them. Doing nothing, and making no provision for an income in retirement, is a strategy filled with at least as many problems.
At some point when studies like this are published, the passive and active investment debate is raised. Passive investing advocates like to point to the very low cost of their preferred funds. They usually fail to include the cost of the tax wrapper or investment platform and the cost of advice.
This means that once again a like for like comparison is not being made. Comparing a passive fund with a TER of 0.4% to an active fund with an AMC of 1.5% is unfair, because the latter will typically include platform costs of 0.25% and advice costs of 0.5%. Add these back into the passive fund and you are then using a more direct comparison of 1.15% for passive and 1.5% for active.
Except that passive investment advisers often use the lower base cost of the passive approach to justify an increase in their advice charges, usually from 0.5% to 1%. If you are comparing the two approaches, make sure your adviser is making a fair comparison.
Here at Informed Choice, we see the value in both approaches to investment. We use passive funds, including ETFs, where broad exposure to a market is desirable. We then use active management where we feel a market or asset class is inefficient, or difficult to access with a passive fund.
Cost is important, but value is what really matters.
Part of the research process we use with every client, before making a specific recommendation, is to consider the cost associated with every potential pension or investment plan from the whole of the market. Modern research software makes this relatively simple to achieve.
But the lowest cost option is not necessarily the best option available. In the pensions market, low-cost usually means restricted investment choice. You can pay less for your retirement planning if you accept a pension plan with a second class range of funds from which to choose.
A comprehensive range of investment asset classes and underlying funds, which will enable you adviser to position your pension savings in the best possible place, naturally costs a little more.
What really matters is the end result, and not losing sleep over how much better off in retirement your Danish neighbour, with his different regulatory environment and range of options, might be in old age.