Pension Schemes Bill [HL] — House of Lords, 2016-12-19
Topic: Labor
Jean Lesley Patricia Drake (Labour, Centre-left): My Lords, there are four key references to administration charges in this Bill: Clauses 12 and 27, the continuity and implementation strategies for addressing how members’ interests will be protected in a triggering event; Clause 33, the prohibition on increasing members’ charges during a triggering event period; and Clause 40, the statutory override power of any term of a relevant contract on administration charges The power of the Secretary of State and the regulator to demand information on, and intervene on, the level of administrative charges, is a key part of the armoury in this Bill for protecting members’ pots. Clause 38 gives a definition of administration charges: that it, "has the meaning given by paragraph 1 of Schedule 18 to the Pensions Act 2014" That schedule relates to the power of the Secretary of State to prohibit or cap administrative charges, as illustrated by the 0.75% cap on charges, excluding transaction costs, on workplace pension scheme default investment funds. But there appears no explicit reference to transaction costs in the definition of administrative charges in paragraph 1 of Schedule 18 to the 2014 Act, and no explicit reference to transaction costs in Clause 38 The purpose of this amendment is to make it clear that any reference to administration charges in this Bill can include transaction costs, so ensuring that the Secretary of State and the Pensions Regulator have the fullest powers of intervention needed to fully protect members’ charges in master trusts. The transaction costs are an important determinant of the net return into the saver’s pot In recent weeks, including since this Bill was introduced into the House, three reports have been published. One addressed disclosure of transaction costs and two provided sustained evidence of continuing dysfunction and weak competition in the pensions and asset management industry. On 5 October 2016, the FCA published a consultation paper proposing rules to improve the disclosure of transaction costs in workplace pensions. Given the potential for multiple parties to be involved in managing pension investments and for transaction costs to be incurred at different levels, the FCA considers it essential that any rules of disclosure, "enable the flow of information to the governance bodies of those schemes" It proposes that all those managing investments should report administration charges and transaction costs to pension schemes and intends to publish its rules in the second quarter of 2017 On 13 December, the DWP and FCA published their joint review of industry progress in remedying poor-value workplace pensions, following the 2013 OFT report that revealed that more than 333,000 members of workplace pension schemes were still suffering annual management charges in excess of 1%. The review also found that most providers had not fully reviewed the impact of transaction costs in their value-for-money assessments and had no immediate plans for such a fuller review. Providers using in-house investment management services were singled out for particular criticism In November, the FCA published its Asset Management Market Study interim report, which provided a hard-hitting critique of the "sustained, high profits" that the industry has earned from savers and pension funds over the years—fund management firms, which three in four British households rely upon to manage their pensions The remedies proposed by the FCA include requiring investment managers to adopt an all-inclusive single charge for everything; an up-front estimate of transaction costs; and raising the fiduciary bar for the general obligation to treat customers fairly to a new requirement to act in the best interests of investors. The report also contains a withering critique of "active management". A recent article in the FT pulled together all the adjectives deployed by the FCA: "Underperforming, overpaid, too profitable, too expensive, too opaque, too unaccountable and too conflicted" The report is quite extraordinary. It compares the net return on a £20,000 investment over 20 years to show the impact of charges. Assuming the same return before charges, in a typical low-cost, passive fund, an investor would earn £9,455 more on a £20,000 investment than an investor in a typical active fund. This figure rises to £14,439 once transaction costs have been taken into account. In an exquisite example of laconic drafting, the FCA reports: "We find that there is no clear relationship between price and performance—the most expensive funds do not appear to perform better than other funds before or after costs" The report makes it clear that seemingly small differences in fees and transaction costs can lead to significant losses for investors over time but finds that more than half of ordinary investors are still unaware that they were paying fund charges, let alone what they are I hope that the Government will force a pace on transparency and act to control unfair fees and transaction costs incurred by people who are saving, often through their workplace pensions, and an increasing number through these master trusts. But insofar as the Bill addresses the authorisation, supervision and resolution regime for master trusts, this amendment makes it clear that any reference to administration charges in any provision in the Bill can include transaction charges, so ensuring that the Secretary of State and the Pensions Regulator have the fullest powers of intervention needed to protect members’ savings in master trusts, particularly during triggering event periods. I beg to move.