‘Savers must come out of the closet tracker’: Hargreaves

‘Savers must come out of the closet tracker’: Hargreaves

The prevalence of closet trackers in pension funds is testament to an industry that has relied for too long on lacklustre default funds, Laith Khalaf has said.

The senior analyst at Hargreaves Lansdown said: “The industry has done little to help savers to make their own decisions. Now investors need to take matters into their own hands, and vote with their feet if they are invested in a closet tracker fund.”

Gina Miller, from the campaign group True and Fair, has accused fund providers who use closet trackers, thereby charging active fees for essentially tracking indexes, of fraud.

Article continues after advert

The FCA has said it would look into the issue later in the year.

Ms Miller said this was not good enough, and said the regulator should bring out a compulsory requirement for every fund to list their active share allocation. Using the example of funds which were 80 per cent index and 20 per cent active, Ms Miller said: “If you charge a fee for the active part you end up with a fee of 7 per cent”.

Citing a recent announcement by the Swedish government to investigate the practice, she added: “In the space of a week, the FCA has changed its stance and has said it ‘could’ launch an investigation. It should be more proactive and look into what constitutes fraud.”

Mr Khalaf did not consider such a practice fraud, especially as many pension funds were sold specifically on the basis that they would not deviate too far from the index. However, he added: “Tens of billions of pounds still remain invested in the old closet trackers, and millions of savers will end up abandoned in them too, unless they take action themselves”.

That said, while the practice had been fairly standard in the industry, he said he believed it was gradually changing, with company pensions increasingly using pure passive funds as a default rather than active funds.

Adviser View

Jason Butler, senior partner at London-based Bloomsbury Private Wealth, said: “This is not just about more disclosure. There are two numbers that are important here – one is the total ongoing cost, which is all costs including turnover within the fund. The other is a simple measure that demonstrates the skilled based return.

“The regulator will get to this, but at the moment it has too much to handle.”