Pension saving is too expensive. According to a report from the Royal Society of Arts, up to 40 per cent of pension savings disappear in fees and costs under the UK’s current system of private pension provision.
Personal accounts, the national scheme to be rolled out in the UK from 2012, are designed to tackle this problem. People will be automatically enrolled into the scheme, removing the marketing and selling costs that have helped make personal pensions so expensive.
But the £3,600 annual limit on contributions to personal accounts is too low, says the RSA report. People who want to put aside more for their retirement will have to use more expensive plans. The solution, says David Pitt-Watson, author of the report and founder of Hermes Equity Ownership Service, the world’s largest shareholder stewardship service, is to allow other low cost funds to make use of the personal accounts machinery to cater for those who want to make additional contributions.
These funds would also have to take seriously their responsibility as investors. This is Mr Pitt-Watson’s other big complaint about the current system. Pension savers are owners of large slices of the world’s biggest companies, but they have no interest in acting as owners, and the fund managers who look after the investments have mostly failed to act as responsible owners.
Pension funds must use their muscle to ensure good behaviour in the boardroom, he says. The problem is that the old defined benefit schemes are in decline, and the new funds taking their place are too small to take on this role. But if funds can access savers through the personal accounts mechanism, they will be big enough to take on the costs of engagement and still keep costs low for investors.
Well, it might work. But Mr Pitt-Watson will find himself up against the life company lobby, which has much to gain from keeping personal account contributions capped at £3,600. Indeed, the Association of British Insurers was quick to rush out a press release defending the £3,600 limit and denying that private pension charges are damagingly high.
He will also have to convert the responsible investment sceptics, who are not convinced the costs of engagement are outweighed by the returns from better-run companies.
That is a lot of vested interests to push against, but in the current climate he might just make headway.