Ed Miliband has called it the next "massive, massive issue" after the phone-hacking and Libor scandals. He is of course talking about the convoluted world of pensions and its hidden charges. I’ve been talking about just how ugly and dangerous these charges are for some time. And I have to say that I’m delighted to see a politician finally picking this fight.
Milliband picked over some ugly examples last week. He pointed out that somebody who could reasonably expect to receive an annual pension of £32,398 will in reality only receive £15,964 once you strip out the fees (I’ll show you why in a moment).
Why he is saying this now? Well, I suspect that Miliband sees some votes in it. The knives are out for rapacious businessmen and greedy financiers, and now it is time for fund managers to be lanced upon the skewer of public opinion.
Be prepared to laugh (or cry)
Needless to say, Miliband has over-egged the pudding. His figures refer to somebody who saves £50 per month for 40 years, at the end of which (I assume) he buys an annuity. We are not told the investment return that is achieved over these four decades. But we are told that an annual management fee of 0.5% on this contribution plan delivers the £32,398 pension while a 4% annual management fee cuts this pension in half.
This is accurate but Miliband need hardly have chosen such extreme examples.
The 4% is based on the 3.96% charge levied by the Neptune Mid Cap Fund, to which Neptune hilariously responded that "we believe that a high standard of client service is an essential part of what we do". Given that the average pension fund investor does not even want a ‘service’ other than a decent investment return this is quite the most ridiculous justification imaginable. Anyway, most fund managers are not quite as greedy as Neptune, and 2.5%-3% would probably be a fairer figure.
As for the other end of scale, 0.5% is below even that claimed by the industry spin doctors. The average management charge, according to the Association of British Insurers, is 0.77%. It claims that charges are falling and – prepare to laugh once more – "the pensions industry is absolutely committed to ensuring that charges are as low as possible and that customers understand what they are paying". I very much doubt that.
Penny shares to watch 2013
Red Hot Penny Shares is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares never risk more than you can afford to lose. Penny shares can be riskier than other investments – they can be relatively hard to trade and if you need to sell soon after you've bought you might get less back than you paid. Please seek independent financial advice if necessary. 0207 633 3601.
Two gripes we have about fund charges
But now that Miliband is singing off my hymn sheet I can hardly knock him too hard. Fund management charges are a scandal. They have been for years. When markets were rising nobody minded too much. But if the annual investment return is only 5%, you don’t want the managers to take half of it. And with many managers falling a long way short of that kind of return, it becomes especially annoying.
Now, let’s be reasonable. Managing funds is not of negligible value. Somebody has got to do it. Somebody has got to make the investments, keep the records, ensure that the assets are secure, provide the reports etc. Not everybody wants to be bothered with these tiresome administrative matters. So the real gripe is about other things.
The first is the feeling that everybody who has a hand in managing our savings is taking more than a decent cut. Whether it is the fund accountant or lawyer, custodian or fund manager, we all know that these people are doing very nicely for themselves out of our money.
The second gripe is over fund management fees, which are high in absolute terms, but especially high when stacked up against the investment returns.
An industry waiting to be pummelled with hard objects
The fund management industry is like a fairground coconut just waiting for somebody to start flinging hard objects at it. And they deserve that treatment. The truth can be found in the accounts of the quoted fund management groups. Take, as a representative example, Jupiter Fund Management (JUP). Its 2011 accounts reveal that the three executive directors received an average of £1.3m in cash remuneration, aside from any share awards, while the 403 staff shared £59.3m. That is an average of £147,000 each, and they received another £31,000 of share-based awards on top of that.
Very few of these people could earn even half of this outside the cosy cartel of fund management. But the most important figure is this: the cash remuneration paid out to Jupiter’s staff came to about 0.34% of the value of the funds managed for customers.
Even at one third of their current packages Jupiter’s staff and director would still be paid handsomely. If the other two thirds was given back to investors in Jupiter funds, that alone would cut fund management fees by c.0.2% a year. It does not sound a lot, but compounded over time this would be worth thousands to investors.
I don’t often find myself agreeing with Ed Miliband, but on this occasion I don’t mind giving him a bit of help.
• This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.