I wrote most of what follows on the need for massive accounting reform in the pensions industry to make this sector accountable to those who provide it with its funding and who are dependent upon it in 2009. I updated it a bit in 2012, and nothing then came of the idea; I can't now recall why. It was some thinking for a research project that has not happened, and is not now on my agenda and which I have no time to pursue.
However, it remains highly relevant, not least in the light of the comment by Polly Toynbee in the Guardian today on the government's failure to cap pension costs which will leave the vast majority of people in this country open to continuing abuse from the pensions industry.
So I now offer the idea - for what I called 'pensionholder' reform for others to pick up if they will.
Background
I got a statement from my pension fund recently. It was a depressing read. I will be impecunious in my old age: the fund have not managed to make investment returns since time immemorial; the amount I have paid in over the years seems hardly to have grown despite the tax relief the fund supposedly enjoys, and worst of all I am offered no explanation of any sort at all for this state of affairs.
It is the last fact that troubles me most. I entrust a pension fund with my money and, to be candid, I get nothing in return. If I invested my money in a company I would expect to get a full set of audited accounts from them each year. Implicit in that relationship with a company in which I invest is the understanding that the directors are acting as steward for my funds and must account to me, in some detail, about what they have done with it.
Company accounting
So a company tells me about who runs the show — and what they are paid, in considerable detail. They tell me what they are seeking to achieve, and even if I know a lot of that is spin I also know that there is some credibility underpinning it in most cases.
They tell me how they have traded, what they trade, in some cases where they have trade (although I usually want to know more about both what and where they trade). I know what costs they incur, how many people they employ and what they pay them, at least on average. The profit or loss is declared and I know if tax is paid. I also get a balance sheet to show me how the funds are invested on my behalf — and even if they have no idea who I am and probably care less the point is I get all this data. And I appreciate it.
Pension accounting
But if I give my money to the tax preferred pension fund that are meant to manage it for me, with state endowed tax preference built into the relationship I get none of this. I am told the value of my fund and if it has gone up or down, and how much of that is due to me paying cash in. I am told what they will pay me back on the fund, which ludicrously is always less than it is supposedly worth — by a margin of well over 20% on the current statement, making a mockery of any value given. And then I am told that if the fund were to grow using wildly optimistic forecasts which seem to bear no relationship with past performance I might bet a tiny pension in many years time that has the sole effect of alienating me from the entire process.
The pension reporting conundrum
Why is this? Why is it that when a company is required to account to each and every shareholder — even if they have a minute holding — the data I get from a pension fund on which my future well being might depend is so pitifully small? And why do I know nothing at all about what this fund does to make the return I enjoy?
The scale of the issue
We all know that stock markets have failed badly of late. We all know that there is demand that management be held to account for what they do. But the reality is that I, like most in this country, engage with the stockmarket (when I have to) through the offices of a third party — a pension fund — run in turn by a company that is itself quoted on the stock market — and they don't even send me their own accounts which I'd get as a shareholder. I'm far from being alone in this situation. Up to £70 billion a year has been paid into UK pension funds. Almost half of that came from voluntary contributions. Total value of current UK defined contribution pension funds to which these contributions are made may be £450 billion (August 2009 data) . These are the funds I am worried about: the sort where the investor takes the risk if things go wrong and so needs the maximum information on what is happening in their fund. Despite this even people like PIRC (Pensions Investment Research Consultancy) place little or no emphasis on reporting to shareholders when they discuss the crisis of governance in the City that the current financial climate has exposed.
Moral hazard
I am not happy about that. I know that unless there is accountability there is moral hazard: that is the phenomena where a party (in this case the pension fund) is insulated from risk and so behaves differently from the way it would behave if it were fully exposed to that risk. The risk would be the challenge to pension fund management that would arise if we knew just what they were doing for us.
The information we need
So what information do we need as pension fund holders to ensure that the funds in which we invest are truly accountable to us for what they do, always remembering that if we held them to account for that this could in turn create the pressure to hold the City to account for what it does, so creating pensionholder capitalism?
I suggest the following would do for starters, to be sent to evert pensionholder every year as if they held shares in a company for whom such accountability is, of course normal:
1: Who runs the fund
1.1: The name of the company
1.2: A summary of their accounts
1.3: Full details of where and how their full accounts can be obtained
1.4: The name of the fund in which the prospective pensioner has invested
1.5: Where the constitution of that fund can be obtained from, and how
1.6: The names of the individual pension fund managers responsible for the fund and for each such manager:
1.6.1: Their age
1.6.2: Summary CV
1.6.3: Qualifications to undertake the task entrusted to them
1.6.4: Remuneration, split between basic pay and bonuses
1.6.5: Any other appointments they have
1.6.6: Any conflicts of interest they might have e.g. personal shareholdings
1.7: The method of changing the fund managers available to the prospective pensioner
2: What the fund has done
2.1: What its income was in a year, split between:
2.1.1: Dividends
2.1.2: Interest
2.1.3: Rents
2.1.4: Hedge funds
2.1.5: Private Equity
2.1.6: Profits and losses (each stated separately to come to a net disclosed figure) from trading investments split between
2.1.6.1: Equity shares
2.1.6.2: Corporate bonds
2.1.6.3: Government bonds
2.1.6.4: Property
2.1.6.5: Cash related activity e.g. foreign exchange trading
2.1.7: Income from other sources
2.1.7.1: Stock lending
2.1.7.2: Fees
2.2: Volume of trading
2.2.1: Gross purchases and sales of each of the following netted to produce a net movement
2.2.1.1: Equity shares
2.2.1.2: Corporate bonds
2.2.1.3: Government bonds
2.2.1.4: Property
2.2.1.5: Hedge Funds
2.2.1.6: Private Equity
2.2.1.7: Cash held in other currencies
2.3: Costs of trading
2.3.1: Split by category, as noted above
2.4: Movements in value of assets in the year, not yet realised
2.4.1: Increases and decreases in value for each of the following, each then netted to a total
2.4.1.1: Equity shares
2.4.1.2: Corporate bonds
2.4.1.3: Government bonds
2.4.1.4: Property
2.4.1.5: Hedge Funds
2.4.1.6: Private Equity
2.4.1.7: Cash held in other currencies
2.5: Administration and other costs
2.5.1: Salaries
2.5.2: Research
2.5.3: Overhead costs
2.5.4: Management fees to parent institution
2.5.4.1: NB if the previous three categories are included in a management fee an indicative split of the management fee into these categories should be given
2.5.5: Audit fees
2.5.6: Regulatory fees
2.5.7: Other costs
2.6: Surplus for the year
2.6.1: The surplus or deficit for the year allocated by sub fund if appropriate
3: What the fund invests in
3.1: A balance sheet for the fund
3.1.1: Investments
3.1.1.1: See separate notes below
3.1.2: Current assets
3.1.2.1: Split in the format required by Company Accounts
3.1.3: Current liabilities
3.1.3.1: Split in the format required by Company Accounts
3.1.4: Member funds
3.1.4.1: Opening funds plus contributions less the result for the year equals closing member funds
3.2: Investments
3.2.1: Detailed notes required by asset category showing value brought forward, additions, disposals and movements in asset value - to reconcile with notes in the statement of what the funds has done - leaving closing cost
3.2.2: Equity shares
3.2.3: Corporate bonds
3.2.4: Government bonds
3.2.5: Property
3.2.6: Hedge Funds
3.2.7: Private Equity
3.2.8: Other
3.3: Investment analysis
3.3.1: List the top 100 investments by value at the start and end of the year and note the following for each
3.3.2: Name
3.3.3: Type of asset by category already noted
3.3.4: Proportion of the fund invested in the asset and proportion of the asset held (e.g. what percentage of the company invested in is owned)
3.3.5: How the asset invested in generates its income .e.g. what use is made of a let property, what trade a company pursues
3.3.6: Whether the investment is considered ethical, referencing an accepted standard
3.3.7: Whether the investment is in a low tax jurisdiction (headline corporate tax rate of less than 20%)
3.3.8: Value at the start of the year
3.3.9: All purchases
3.3.10: All sales
3.3.11: Profit or loss
3.3.12: Value at end of year
3.3.13: Total income received
3.3.14: Income of highest paid director in company invested ion
3.3.15: Whether the fund voted against any resolutions put by the company in the year and if so what on and why
4: Other information
4.1: Future investment policy
4.2: Green policy
4.3: Ethical policy
What this information would let us do
There are numerous good reasons for providing this information. First and foremost being accountable is a key component in good governance. It is extraordinary that we have a system of pension fund management that outside people's houses represents one of the biggest repositories of wealth in the UK and yet no one, the Turner report included, thinks it necessary to require proper accountability of the funds in which people deposit their savings and about which, in consequence, they know almost nothing.
Second, when something is observed it changes. If pension funds can be better monitored their performance will improve. This is vital for our well being.
Third, this data empowers pension fund holders to ask questions of their fund. At present this is almost impossible to do.
Fourth, pension fund holders will now know they have direct association with major companies of whom they might never have heard but whose performance is vital to their own future. Nothing will drive improved performance and governance in the City like being accountable to a mass of people will.
Fifth, people should be allowed to vote the shares their pension fund holds if they so wish and attend at the annual general meetings of the funds in which their fund is invested and speak as if members if they so wish. This will break the stranglehold that ‘investors' are considered to be pension fund managers, most of whom come from the same background as those whom they are meant to be holding to account but which they have completely failed to do.
Sixth, transparency will improve choice and so performance in the market. Alternatively, and as importantly, it will bring pressure to bear to reduce cost and churning of investments if both have to be reported, as the above disclosure requirements implicitly require. These are at present major areas of suspected abuse of pension funds by fund managers.
Seventh, such accountability may improve the rate of pension saving.
Eighth, this accountability will require pension funds to account for the enormous tax benefits they receive.
Ninth, the risk of pension failure should be reduced.
And tenth, people might have a better sense of well being if they can better understand what their pension fund is doing for them.
What will it cost?
Such a proposal is bound to result in a clamour of protest from the City and all pension fund managers. There is one obvious response to that, which is that all markets work best when the highest quality information is available to all participants and why should the enormous pension sector be any different?
Cost is, however an issue, but one that is almost irrelevant. Firstly, all pension funds are audited already. Second, this data (with tiny exceptions — such as that on ethical standards, which is industry generic and therefore easy and cheap to procure) has to be produced already is a pension fund is to prepare proper accounts. Therefore, and third, the only significant additional cost would be printing which could be avoided by providing the report in default form on the internet with hard copy being sent only to those who specifically request it.
And cost may not, in any event, be an issue. It may well be that the pressure of exposure will result in considerably more cost being saved than this measure will cost: the outcome of transparency is almost always enhanced performance and that is what should be expected here. In other words, cost is not an issue.
Why now?
Now is the time for reform. It is the government's intention that more people should, as a result of the Turner reforms to pensions, be required to invest in stock market based pension funds. The obligation may or may not make sense but what is without doubt true is that compulsion without accountability is unacceptable. This therefore is the time to create accountability within out pension funds and in turn a whole new pensionholder capitalism where those who manage pension funds and the companies they are in turn investing in are held to account by those on whose behalf they act — the future pensioners of the UK. Then we move towards a world of real openness, transparency and accountability which is essential if we are to bring an end to the excess, waste and unaccountability of the City, our financial institutions and British business.
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It may well be the governments intention that more people invest via pensions, but I see no interest in them reforming what is, at best, an incompetent industry, and at worst a corrupt industry.
I prefer to consider that the government, in the form of elected officials with dubious backgrounds and contacts, want more money to be placed in the hands of people PROVEN to be little more than well-paid common criminals.
Soon we will have the state pension age back where it was when it started in the early 1900s´, although the amount it pays it a bit higher than two shillings a week. But bearing in mind that the average lifespan of the working man then was around 45……
I expect, with healthcare reforms, we shall soon see a lowering of lifespan again…
Truly, this society is in a sorry state when common criminals become leaders of politics and industry.
One of the main problems here, Richard, is that you would need something along the lines of accounting skills to make sense of this – if we had a truly transparent financial system and schools educated people about these very things that affect their lives so much then this could be attained. The financial sector know that it can rip off Joe Public with the greatest of ease. Wealth syphoning has never been easier!
Another thought: Why are the Pension funds always crowing about a ‘deficit’ they have to fill if they are ripping people off sideways with hidden charges??
See:http://www.telegraph.co.uk/finance/financialcrisis/9834247/QE-has-left-companies-with-a-90bn-pension-bill-MPs-told.html
Are they liars? hard for an amateur like me to understand.
Simon
The problem is that it’s hard to understand & that makes it easy for poor products to flourish.
The schemes that have deficits are final salary schemes (these are called defined benefit schemes). These are usually occupational pension schemes holding investments. They have a deficit when the value of their assets is less than the estimated value of the liabilities – ie the estimated present value of the future pension payments. The discount rate used in that calculation is related to risk-free interest rates, which QE is helping to keep down. So you have a lower discount rate and hence a higher present value of the liabilities. QE is also holding up the asset side of the fund but the net effect is generally to reduce the net asset position. In theory, this could correct itself if QE reversed or bond yields went up more generally. But it’s a complex interaction. If you need more detail than that you’ll have to speak to a friendly pension actuary.
High charges/poor performance in defined contribution/money purchase schemes is a different issue. They will give you a poor fund value but not a deficit.
Unfortunately defined benefit schemes, which give you more certainty about the size of your pension, are mostly closed to new members and the future of pensions is in defined contribution schemes that push the investment risk onto you as an individual.
TP
Thanks for the helpful explanation -I have a defined benefit scheme from my teaching days (which ended when I was 40) and I have regarded pension schemes since then as largely scams so I will have to survive on a pension based on 15 years of teaching (I think it is forecast at c. £45 a week=lump sum).
Richard
I assume that this is a DC scheme you are writing about? If I were in a fund as bad as that, I’d move.
TP
All funds are that bad…
Policy of despair! They are not all that bad. I have my DC money in a range of passive funds with low charges spread across UK/RoW. Nothing fancy. They’ve done fine. Thankfully I have DB benefits from an old scheme so I’m in a pretty fortunate position compared to most.
Extra disclosure is generally a god thing, so carry on lobbying for that, but it will take a long time to agree a change and then even longer for that to have an effect.
If you want to punish the poor providers right now then you must move your funds to a better place.
Mine (a perfectly ordinary high-street one, nothing fancy) has done fairly well the last couple of years. Perhaps you need to consider moving your fund, as Tobin Pigou says?
But in principle I broadly agree with you. Knowing what the fund is doing helps you decide whether to invest in it, just as with companies, so publishing more data may encourage more people to invest in you.
Though knowing the age of the fund manager seems entirely irrelevant, and is perhaps inconsistent with the way age discrimination is generally discouraged these days.
The pensions industry is just one more way to steal surplus labour from whose who create wealth. The only way to sensibly provide pensions (deferred wages) for all is a public scheme along the lines of SERPS, paid to current pensioners from the National Insurance Contributions of current workers. That way there is no exploitation and leakage.
Carol
That is just exploiting the wages of future workers through a different route – tax rather than a share of profit.
Why is that better?
TP
It is better because the surplus labour is being shared by labour, not by capital or land owners.
Also, with a SERPS type scheme, you get out commensurate to what you put in.
“The only way to sensibly provide pensions (deferred wages) for all is a public scheme along the lines of SERPS, paid to current pensioners from the National Insurance Contributions of current workers.”
Which is great when there are lots of workers and hardly any pensioners but when the numbers of workers drops and people live longer…..then you’re going to be entering difficult territory.
We are going to be in ‘difficult territory’. A friend did a calculation recently and came up with a figure of something like 40% of total wage (including employers’ NIC) required to fund decent pensions. Few current workers can be persuaded to voluntarily pay sufficient into a pension scheme when they can barely cover living expenses. So far as I can see SERPS is the system with the least leakage – and we cannot afford any leakage.
It took Labour over 10 years to implement SERPS and within a year or so the Tories got in and started to destroy it. If SERPS had continued we wouldn’t be where we are now.
The ‘difficult territory’ includes how to provide care of the frail elderly. At some point we will have to recognise this as an opportunity since personal care is and will for the foreseeable future be a labour intensive ‘industry’.
¨if we had a truly transparent financial system and schools educated people about these very things that affect their lives so much then this could be attained¨
Quite frankly, many well-educated people know little about the machinations of investment.
Especially when those machinations are designed to conceal charges that many would consider excessive; If they knew about them.
Honesty in investment advice would be nice. Clarity in same would be nice. Neither of which are too evident.
I expect the 90 billion pension bill is as a result of the gov buying-back their bonds and paying less interest as a result. Shame. But then, many of the companies moaning about it are also in the financial mess up to their neck due to PPI and other assorted criminal activity.
¨I will be giving a talk for the Economic Research Council (ERC) on Monday 24 February.
The talk will be called “THE GREAT SAVINGS AND PENSIONS SCANDAL…and how to protect your money”. In the talk I will expose how the sales messages and methods used by financial services insiders to get us to put our money into things like banks, shares, unit trusts, pensions, annuities and equity release schemes are almost always misleading and usually based on blatant lies¨
http://www.snouts-in-the-trough.com/archives/8196
Most people don’t want to know because it is more painfully dull than is bearable.
In the words of Jeremy Hardy “I would far rather die penniless in a gutter than have to spend 30 minutes listening to Moneybox”.
Richard here touches on one of the most important issues for many of us in the coming years…
Besides pensionable age, which is a great taboo for many, the amount and quality of the pensions is a huge issue.
Being someone who has worked in the City, including for one of the brandname fund management firms, I have a very good insight on the value chain. I left the city almost 15 years ago, quite clearly understanding that no value will ever be created for the pensioners.
Issue number one: the herd mentality in the field. Most pension plans are using a very limited number of consultants who apply the IBM principle. Buy a known name.
Issue number two: very little incentive to produce performance. As long as you beat or remain close to some index, you’ll do OK, once you are in the chosen managers.
Issue number three: and for me this is the most perverse, it is the cost overlay on top of the managers’ compensation. Pension funds or pension products are incredibly attractive to the seller of these. Once you attract 1000, 10k or 100k in your products, you most likely have them for 10-20 years… And you suck 1% out of the structure every year. The difference between your fund producing 5% in the long run and your pension product giving you 4% after pension structure cost is huge in compounding terms.
And as most people do not understand the power of compounding, they lose out HUGE at retirement.
The problem is that one should all be smart and NOT invest through pension plans, but the tax break given to the pension industry makes this virtually impossible! Collusion between pension industry and politicians? I wouldn’t dare to comment on that.
Richard is right that transparency would help, but just as it is not easy to understand company accounts, pension accounts would be just as complex and tedious to analyse!
Richard,
I agree with you about the problem, but for once I disagree with your solution. The trouble is that you will have to pay for the information and there will be even less left in the pot for your pension.
The real question is whether the tax breaks on pensions compensate for their high charges, complexity, inflexibility and opacity. It is sensible to save for your retirement and pensions have generous tax breaks, but this does not necessarily mean that a pension is the best way to save for your old age.
It is not a bad rule that generous tax breaks are highly correlated with expensive and inefficient financial products.
If you have a decent defined benefit pension, or a defined contribution pension with a generous employer contribution, fine. But I suspect that many smaller self-funded DC pensions pay more in charges than they receive in tax benefits.
If you get the charges right, you have a better chance of getting the returns right. I would suggest consider alternatives and aim to keep all administration and management below 0.5%.
Good luck
This data had to be available or a fund is not being managed
The reason for denial of data is never cost
It is always to hide the truth from those who are exploited as a result
Again, I agree with Richard. I know for a fact all the data are available and any smart kid can in 3 months programming get all the data sorted. My be an expensive kid to do it well, but on the amounts under consideration, it is nothing.
In my time as a fund manager and then as an operations guy in that industry, I had all the data at my finger tips.
Mr. M.,
If a major fund like BSPS can put this sort of ‘bumf’ together, I suspect a much more active fund ought to be able to as well…
http://www.bspensions.com/media/userfiles/files/BSPSAnnualReport2013web.pdf
There’s pages of the stuff!
I am sure ShareAction are well aware of what is happening
@Carol Wilcox,
Carol, I agree with you that the state will have do to something but on Radio 4 a while back, the chap from the IFS said in essence that if HMG did not get a grip / reform / revise / improve / modernise (take your pick) the system…..
…that within about 30 years, over half of all the funds raised by taxpayers will be being spent by HMG on health and welfare costs. All of the politicians on the panel went very quiet.
As to the care industry providing work – very true, but that jobs are not in the main well paid or quite bluntly ones requiring the high degree of education that the state seems to think is necessary for everyone to have.
I know that sounds harsh, but the population will not pay for – nor probably be able to afford – the very high costs of personal care so either costs have to be kept down or something else has to be cut to pay for it.
Frankly – this will annoy Mr. M – I’d rather see the £12bn currently spent on Foreign Aid be chopped and used to provide welfare services for UK Subjects. I do recognise however, that others will most definitely have other ideas as to where the cash should come from.
@Carol Wilcox
I believe that Carol Wilcox is completely right about SERPS and would like to give some numbers to support her.
I was a trustee of a medium sized defined benefit pension scheme for over 15 years. Although such things are widely believed to be impossible, it is still open to new members and is still in modest surplus.
Looking at the last short report to members, the scheme has just under 10,000 members and assets of £940m. Administration cost £1.3m and the investment managers charged £4.1m. At first sight, a running cost of £0.58% does not look too bad. But it is a different story if you set the costs against the pensions paid. Last year £31m was paid in pensions, but when the scheme becomes fully mature, this will rise to £40+m.
In other words, in the future it will cost about 14p to pay £1.00 of pension (it costs more now).
A SERPS scheme would only have to pay the administration costs, say 3.3p to pay £1.00 of pension.
Our defined benefit scheme is probably as cost effective as is possible, since it provides pensions for a stable work force with predictable salaries. This means that it can largely ignore the capital value of the assets and pay pensions from new pension contributions and the income from investments. If the stock market crashes again, the surplus from contributions and income will buy more future income. It can invest for the genuine long term.
A SERPS scheme would have predictable membership and would operate in the same way, but at a quarter of the running cost.
Most defined benefit schemes have less stable membership and less predictable incomes. This means that they have to keep capital invested less profitably, to be available in the short term. It costs them significantly more to provide the same level of pension. (Even worse if their actuary uses ridiculous projections). Many Defined Contribution schemes are likely to have higher costs, which come straight out of the returns. The actual pension is likely to be worse again when it is based on actuaries at their silliest.
The calculations for SERPS are far SIMPLER. It is not wild-eyed socialism, but common sense to get the sums right and argue for a pension system that would be one quarter of the cost to run.
SERPS worked
I am not convinced anything since has