The Observer noted yesterday that:
Highly paid City traders are depriving pensioners and savers of thousands of pounds through high management fees that are often hidden, according to leaked advice provided by consultants to the Treasury. The charges are spreading and are so steep that savers may find they get less back in retirement than they invested in savings accounts and pensions over their lifetimes.
This is just about inevitable. Referring to a City of London publication on the equities market, produced in October 2011, shows that the average rates of return on equities have been as follows:
Pension saving is long term. Over the long term the returns, expect in the small German market and even smaller Swiss market, have been negative. Globally they are 0.5%. Annual pension charges are at least 1.5% in most funds. After dealing costs absorb returns they rise well above that.
As I have argued in People's Pensions in 2003 and more recently in Making Pensions Work, investing pension money n equities did not in 2003 and still does not now make any sense at all. Losses are virtually guaranteed and the City rakes off billions - in my estimate up to £30 billion a year from pension funds - for the privilege of losing it for the ordinary people of this country. This is blatantly capturing the benefit of the common good of pensions for the benefit of a few. No wonder, as I showed in Making Pensions Work, that this industry is incapable of generating any returns at all to pay pensions - which is why all pensions in this country are currently effectively paid for by the state when the cost of pension tax relief is taken into account.
The disaster is that in 2013 millions more people will be compelled to throw money at the City each month. The National Employment Savings Trust - designed in 2006 in another economic era - is intended to force low paid employees to give 4% of their earnings to the City to lose for them month in and month out from 2013 onwards. This will be a disaster for the economy where enforced savings is currently the last thing we want, and it will be a disaster for these savers.
I have met this fund and they refused to consider the alternative of a fund invested in infrastructure as I have proposed. Conventional wisdom has to be followed they say. Which means that these people will be ripped off as are almost all pensioners now, and all to benefit the 1% in the City.
When will we stop this pensions madness?
Making Pensions Work lays out the alternatives.
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Dear Richard Murphy
Pensions do not hold stocks only they hold a mix of stocks and bonds, yes stocks have done badly, but Bonds have been an awesome investment. The high fees on top of massive corruption, some of the largest wall street firms have had to pay back stolen funds, The trustees need to be educated or made liable for bad management. Also the Madoff scandal revealed how Madoff paid kickbacks of up to 5% for introducer’s.
Dan Solin of the huffington post writes on this issue.
http://www.huffingtonpost.com/dan-solin
That table is totally meaningless, firstly it is ignoring dividends and secondly it is perfromance in US$, totally irrelevant for a UK investor.
As of today, MSCI UK has returned an annualised return of 4.1% over the past 10 years or a total return of 49.5%..
To be fair, that is still not great perforamnce given the high charge of 1.5% fee in pension funds, but a large portion of that charge goes to the administration costs of the pension funds and not the fund manager, who on a large pension fund would probably get 0.5%. Schroders, with a mix of pension funds as well as high fee retail funds and hedge funds only earns 0.64% on average across all the money it manages.
Most of the skimming of of investment funds happens by the investment advisor and the platform that you go through, not the investment manager.
The currency is irrelevant! It just creates a common denominator
The table was for a decade…..
You imply a 50% return near enough this year
That’s not credible – so all your data appears dubious
No the difference is that MSCI runs two indexs for each country/region, one is a simple price index and ignores dividends paid, which reduce the index price index (as share price adjust downwards by the index amount when paid) and the other is a total return idex, that adds the dividends on and is a more accurate representation of what an investor reqives. So if the MSCI UK had a dividend yield of 5% and started the year at 100, at the end of the year (all else equal) the price index would be 95, as though an investor had lost 5%. However, the total return index would be 100, and would correctly show the investor’s return.
The MSCI index used in the table above were the price indices not the total return.
Currency is very relevant as a pension fund represents your liabilities in your domestic currrency, so you need to look at returns in your domestic currency. Maybe over that period the Sterling halved against the dollar, so actually a flat performance was better than having money in the bank or buying govt bonds.
When pensions are invested for long term gain and dividend yeilds cannot cover costs the index used is accurate
The total return of the FTSE 100 over the last 10 years (measured from 21st Dec 2001 to today) has been 48.57%. This is not a great return, but at least it is the correct return for someone invested into the FTSE 100. Less of course the fees, which do have an impact and should rightly be highlighted…especially when pretty much every study has found that active management (vs passive) underperforms.
I note that Zerohedge has just put this up
“the UK debt, when one adds to its more tenable sovereign debt tranche all the other debt carried on UK books (and thus making the transfer of private debt to the public balance sheet impossible), is nearly ten times greater than the country’s GDP”
looking at the graph (G10 dept distribution) gives the reason…..
http://www.zerohedge.com/news/psssst-france-here-why-you-may-want-cool-it-britain-bashing-uks-950-debt-gdp
I agree
It’s why I argue feral finance must be curtailed in The Courageous State
I wonder if anyone has looked to see if this is also affecting Child Trust Funds? Another nice little earner for the Financial Services industry.
In a book called The Q ratio valuing wall street, it pointed out that we pay money into the market during a 40yr working life and draw it out at the end of 40 years. Your analysis does not add in the fact that as people approach retirement and have to draw money out they will be heavily into bonds and not stocks, their weighting will be perhaps 80% I am guessing, so your analysis is not really relevant to real world situation.
Pensions are invested because of the charges (39% per FT). So who cares what the real return is to investors. As long as the industry earn the 39%. Plus the tax relief is the way to induce payments and once in , no way out but to stay the course. Only one way traffic, make money for the Financial Services industry at the cost of the gulliable investor plus the tax man. Nice little racket,
what about John Bogle, he says low cost index trackers are best. with correct bond/equity mix based on life expectancy
Better I agree
But still miles from optimal as we need to reform the whole pension investment structure
Need to reform the annuity structure more like. When I retire, I will be 67 (if I make it that far). At current annuity rates, I would get about 5% of my lump sum a year, so that is roughly 20 years without any income or interest that may accrue. On this basis, if I don’t make 90 years (who will when we are forced to work until 67) the insurance company gets a big bonus.
For me, let people who retire take their tax free lump sum and then take as much of the remainder as they want tax paid. This is tax money straight back to the government. It is then up to the person what he does with his money, but that is likely to both help the economy and include VAT, which goes straight to the government. Better for the government to have these taxes, than the offshore balance sheet of an insurance company!
Greedy investment managers nab an astronomical £62.7billion a year from the £2.1trillion held in savings and pensions by exploiting hidden fees. These enormous chunks gouged from nest eggs go to pay City big-wigs bumper bonuses.
On average an equity fund manager gets about 1.5 per cent of the sum invested. This pays for their services, which often include actively managing the fund’s investments.
But on top is added an additional 0.3 per cent and trading costs of 1.4 per cent, the Treasury was told. These hidden charges have increased by 9 per cent in a decade and are getting worse. Foreign exchange fees, custody fees, and incentivised trading rebates that lead to ‘churning’ of investments were also highlighted by Mr Norman.
His criticisms were met with anger by the chief executive of the Investment Management Association, Richard Saunders. He described the accusations as ‘irresponsible scaremongering’ that discourages investing. He also questioned the accuracy of the figures, particularly the £67billion siphoned off in charges, which he says is nearer £11billion.
Read more: http://www.thisismoney.co.uk/money/pensions/article-2077150/We-told-Treasury-reveal-shocking-pension-charges-despite-risk-insist-advisers.html#ixzz1hHtANUgO