Jack Dromey
Shadow pensions minister Jack Dromey comments on the need to set compulsory standards for cost reporting.
When workers save towards a pension, they rightly expect that they will receive the maximum returns possible. Unfortunately, due to the opaque nature of investment costs and charges, this is not possible. There is no obligation for fund managers to report what these costs are and this means that neither pension scheme members, nor trustees can accurately say how it is being spent.
On the 3rd August, the Work and Pensions Select Committee (WPSC) launched an inquiry to examine whether the pensions industry provides “sufficient transparency” of charges, strategy and performance to savers. More than five years ago, the Office of Fair Trading (OFT) launched a market study into the market for defined contribution (DC) workplace pensions with the aim of examining whether, in the light of auto-enrolment, competition is capable of driving value for money and good outcomes for scheme members.
More than five years on, both the Government and Parliament continue to struggle with this key problem and nothing seems to have been learned from the OFT’s ground breaking report. Our citizens who are saving at the workplace have been let down time and time again.
Transparency around costs would have a significant impact on the ability of funds to pay out retirement savings. A study by the Netherlands Authority for Financial Markets found that a reduction in costs of 0.25% would result in a 7.5% increase in collective pension assets over 40 years.
Yet the government has acted like a rabbit in the headlights when trying to deal with pension fund cost collection and reporting. In the UK, DC funds must report costs to scheme members but the collection of these costs uses a methodology which has failed and defined benefit (DB) pension funds, where the vast bulk of investment assets are held, have no requirement to collect and publish cost data.
Clearly if there is no compulsion to collect through a government-supported template and report cost data, it will not be done.
Labour will make pension fund cost transparency a key priority in our first 100 days of government by:
- Ensuring pension funds collect, analyse and report on all administration, investment management and transaction costs – requiring all investment agents to present all costs to their clients on request
- Creating an efficiency target for all pension funds to reach, ensure regulators monitor pension fund performance, including a requirement to consider in-house investment management
Unlike this Tory government, Labour has studied the work of pension funds and social partners in the Netherlands where the cost reporting framework has been a recommended practice by the Dutch trade body, PensioenFederatie, for around seven years. But since 2017, pension schemes have been legally required to report on their costs to the regulator DeNederlandscheBank (DNB).
The framework has enabled pension funds to evaluate and break down the total costs, including transaction costs, associated with running their scheme. Labour is determined to ensure that every worker receives a safe and secure pension to live on after they finish work. And this starts with transparent reporting of costs and charges so that workers know exactly how every penny of their pension is being spent and that they are getting best possible value for money.
Report by Netherlands Authority for Financial Markets: https://www.afm.nl/nl-nl/nieuws/2011/april/kosten-pensioenfondsen
