Ideas man: City of London Mayor Alastair King
A plan to grow workplace pension pots faster by taking more risk has been slammed as ‘truly bizarre’ by a leading consumer campaigner this weekend, in a move that could leave retirees ‘worse off’.
Tesco, BT, and NatWest are among more than 20 firms that have signed up to an ’employer pension pledge’, which prioritises maximising returns for savers over charging them low fees.
The move is led by City of London Mayor Alastair King, who says hiring more expensive fund managers to invest in riskier ‘alternative’ assets – such as private equity and infrastructure – will deliver better long-term returns for pension savers than only investing in the stock market.
Boosting the size of pension pots matters because most of the population is not saving enough for even a modest retirement.
But experts say King’s plan is flawed because high fees devour investment returns over time.
‘When it comes to investing, the only certainty is cost,’ said James Daley, head of the Fairer Finance campaign group. ‘The assertion is that pension funds which are keeping costs low are delivering worse returns, but I’ve not seen any evidence to support that.’
Most ‘active’ pension fund managers, who pick their own investments rather than track the stock market, underperform in the long run, he added, saying: ‘The new employers’ pledge is truly bizarre. I am surprised so many serious firms have put their names to it. If this pledge results in more firms investing more of their employees’ money in more expensive funds, the stats tell us the majority will be worse off.’
Critics say the pledge also fails to tackle an even bigger problem – the lack of cash going into workplace pension schemes, especially from employers.
Under auto-enrolment, 2.4 million firms pay a minimum of 3 per cent of a worker’s salary into their occupational pensions, which are then invested on their behalf without any guarantee of a set income when they retire.
More than 11 million private sector workers chip in at least 5 per cent of their salary to save for their golden years in this way.
These minimums could rise in a long-delayed Government review of retirement savings, which is due to be announced by Pensions Minister Torsten Bell tomorrow.
Fees are capped at 0.75 per cent a year of a fund’s value for default funds, driving some schemes to opt for cheaper, ‘passive’ forms of stock market investing.
‘The knock-on impact of this heavy focus on fees has been shrinking allocations to UK equities, starving UK companies of capital,’ said Jason Hollands of wealth manager Evelyn Partners.
The Government has no plans to lift the fees cap, but hopes to keep costs down by encouraging more pension funds to merge into larger schemes to invest in private companies, Hollands said.
King, who founded his own fund management firm, also called for the cash Isa allowance to be cut from £20,000 a year to boost investment in UK firms. That idea is on hold after a backlash by building societies, which rely on savers’ cash deposits to fund home loans and other lending.
Patrick Tooher
