Fees furore reignited as study claims costs 50% above AMC
A study is set to fan the flames of the ongoing debate over pension charges as it claims to reveal that many funds’ costs are 50 per cent above the figure quoted to customers, with managers not disclosing any indirect costs above the headline annual management charge to members.
Almost a third of direct contribution pension providers are unwilling to describe in detail the indirect costs associated with their funds, a survey of 300 fund managers conducted by consultancy LCP suggests.
The study found 30 per cent of DC providers did not provide details of indirect costs, and that trustees and company management are largely unaware of such costs.
It also found that costs continue to be “substantial”. For diversified growth funds, often used as the default option for DC schemes, total costs were found to be as much as 50 per cent higher than the headline direct annual management charge. In some cases the combined additional costs including trading costs were more than 100 per cent higher than the quoted AMC.
This is often due to non-disclosed fees charged by external holdings in the funds, the report states.
The report is likely to reignite a debate that has been raging in recent months and that has seen Labour leader Ed Miliband hit out against the industry and call for “rip-off costs” to be capped. His comments were described as “misinformed” by association of British Insurers chief executive Otto Thoresen.
Heather Brown, investment partner at LCP and author of the report, said: “Our first report on DC pension fees shows that the overall costs for DC funds can be substantial, which is a particular concern at this time with the imminent introduction of auto-enrolment and the expected growth in the number and size of DC pension arrangements throughout the UK.
“More transparency on fees is needed to help employers, trustees and pension schemes as this could lead to lower costs, which should result in larger pensions for members.
Specifically, Ms Brown called for closer attention to be given to pensions’ default investment option, which is where most DC scheme members invest.
The survey also found that bundled service can in practice be more cost effective than unbundled. However, LCP pointed out that bundled pricing could enable providers to hide additional costs.