Bloomberg News

Miliband Says Pension-Industry Charges Are Next U.K. Scandal

July 12, 2012

Miliband Says Pension-Industry Charges Are Next U.K. Scandal

Demonstrators in support of public sector staff striking over pension changes outside the Houses of Parliament in London on Nov. 30, 2011. Photographer: Adrian Dennis/AFP/Getty Images

Ed Miliband, leader of the U.K. opposition Labour Party, said that after journalism and banking, the next scandal in British public life will be over fees charged by pension companies.

“The next chapter, after banking, will be some of the scandals of the pension industry,” Miliband told journalists after a lunch in London today. “We’re determined to tackle this in the next stage of what we do. Otherwise people are going to say to us when they retire, ‘I had no idea what was coming down the track.”’

The average British mutual fund charges 2.21 percent of its clients’ assets annually, compared with 1.04 percent in the U.S., according to academic research published by the Review of Financial Studies in 2009. Opaque fee structures, which exclude trading charges that can double the cost of owning a fund, make it difficult for customers to compare products and hurt competition.

A pension fund charging 2 percent a year will reduce the value of the fund by 49 percent over a 20-year period due to compound interest, according to SCM Private, a fund management firm campaigning against high fees.

Miliband has had success in the past year in calling for the resignation of News Corp. (NWSA:US) executives over phone hacking. He also led demands for Robert Diamond to resign as chief executive officer of Barclays Plc over the rate-rigging scandal. Diamond quit on July 3. Labour is now working on ways to highlight the effect of high charges on people’s pension savings.

‘Question Mark’

“From bankers’ bonuses to fund fees to insurance policies that don’t pay out, there’s a whole question mark over the quality and reliability of financial products,” Nigel Legge, former CEO of Liontrust Asset Management Plc (LIO), said in a phone interview. “Fixed fees in general are far too high. Pension funds don’t grow as much as they are supposed to.”

London-based Legge now runs Vinculum, part of Absolute Return Partners LLP, and does not charge any fixed fees. His funds charge 20 percent of any gains above their benchmark.

Faced with record-low returns on cash and the closing of many company-guaranteed pension plans, British investors have flocked to mutual funds in the last three years even as hidden charges have dragged down performance. The fees paid to fund managers and passed on to brokers, traders and sales platforms have caused more actively managed funds to underperform their benchmarks than similar funds in the U.S., according to studies by Vanguard Group Inc.

‘Falling Steadily’

“Pension-fund charges have been falling steadily for the last decade and are continuing to fall,” said Otto Thoresen, director general of the Association of British Insurers, which says the average charge for existing pension plans is 0.77 percent. “Scaremongering about charges runs the risk of putting off many people from saving into a pension, which is critical for their financial future,” Thoresen said in an e-mailed statement.

The government is planning a system that compels firms to automatically enroll employees into a pension plan starting in October.

Asked what he thought a reasonable fee was, Miliband pointed to the fund set up by the last government, which charges 0.5 percent.

To contact the reporters on this story: Robert Hutton in London at rhutton1@bloomberg.net; Kevin Crowley in London at kcrowley1@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Edward Evans at eevans3@bloomberg.net


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