No hidden charges: making pension costs transparent

Pension charges have long been hidden from customers. Hari Mann FRSA and David Pitt-Watson FRSA look back at the part the RSA has had to play in bringing about transparency and disclosure of costs.

Imagine walking into a clothes shop and enquiring about the price of a shirt, only to be told that it was too complicated to work out.

Until the Financial Conduct Authority (FCA)’s recent milestone announcement about a new transparent disclosure regime, the world of private pensions looked a lot like this clothes shop scenario.

Customers were told about some of the costs of managing their pension, but there were other charges the industry claimed were too difficult to calculate. Indeed, many investment managers simply told customers that hidden charges didn’t exist.

This is unacceptable. In every other industry, from fashion to technology, you know the price you are paying for a good or service. Markets can’t work unless you do, since the point of a market is that you know how much you have to pay for the goods and services you purchase. Giving a supplier the power to simply remove money from your account without your knowing is an invitation to abuse.

Yet this was happening in the pensions and investment industry. This is what prompted the RSA to campaign to ensure that providers offer transparency and disclose the costs of their products. So, how did change come about and what part did the RSA play?

Tomorrow’s Investor

Back in 2009, the RSA’s Tomorrow’s Investor project began with a series of citizens’ juries, aimed at asking what savers would like from the financial system. One witness explained to the jury how costs and charges could take away significant value from the overall pension fund. If 1.5 percent is taken each year, about 38 percent of the possible pension you could have received will have disappeared in fees. Most of the jurors found this extraordinary. The financial system had done little to help people understand opaque pension costs and charges, even when crucial information had been withheld from customers.  

In 2012 Tomorrow’s Investor published a report called Seeing Through British Pensions. In it, we investigated the misinformation that was being given to pensions customers. We researched what happened in other countries and noted that in Holland and Denmark much better reporting was being introduced. Working with experts, we suggested similar arrangements for the UK.

When our report was issued it hit the headlines. The government commissioned an inquiry into pension charges from the Office of Fair Trading. Some pension charges were capped. Others had to appoint independent boards to eliminate certain abuses. But a simple clear statement of the charges was still lacking.

A new transparency

The RSA helped establish an extraordinary civil society group, the Transparency Task Force (TTF). The leader of the RSA investigation was appointed the TTF’s first ‘ambassador’ – its 100^th was a former pensions minister. The TTF established a network of practitioners and together we encouraged and gave evidence to a Parliamentary Inquiry. The TTF went on to work with other experts and regulators.  This brings us today to the FCA’s ruling that pension costs and charges must be declared openly and clearly so markets can work well and abuse will be more difficult. In Britain we save over £3,000 billion in pensions and other savings. If fees were reduced by just 0.1 percent that would save £3 billion every year. This new transparency is a welcome change and one which is long overdue.

Hari Mann is a Professor of Strategy and Innovation and has worked with the RSA Tomorrow's Investor project for over ten years. Previously, he was an investment banker in the City.

David Pitt-Watson is a fellow at Cambridge University, Judge Business School. He leads the RSA’s Tomorrow’s Investor project. He was formerly a director of Hermes Fund Managers and founder of their responsible investment activities.