The pension industry, so long riddled with absurd charges and overpaid and underperforming fund managers, finally has a real competitor. It’s called the UK government.
In a little-noticed technical change that escaped Monday, the Department of Work and Pensions lifted the ceiling on contributions to the government scheme it put in place in 2012, and said people can transfer their pension funds from old employers.
The move indeed turns the government into a convenient and inexpensive alternative to Aviva, Standard Life and Legal & General – and underlines how overcharged the British public has been so far.
From the moment when the diagram – National Employment Savings Trust or Nest – was created, the private pension industry sought to cripple it, covering it with a multitude of restrictions. Why? Because he showed the industry for the overloaded beast it had become.
Unlike private providers, Nest said it could handle small contributions that can stop and start (for example, during maternity leave) perfectly. It does so without public subsidy, for an annual fee of 0.3% of the person’s money.
That number has horrified the pensions industry, which routinely treats its members between 1% and 3% a year – the money used to pay fund managers salaries of over £ 1million and hefty broker commissions. He said Nest was unfair competition and demanded that it be allowed to only take on workers who pay small amounts (customers they didn’t want anyway) and be prohibited from taking accept project transfers from large companies (their juiciest clients).
Unfortunately, the government gave in at the time. But yesterday Pensions Minister Steve Webb lifted the restrictions – but only from 2017, when the roll-out of automatic enrollment from large employers to small ones is finally complete.
Nest keeps costs low primarily by investing members’ money in cheap tracking funds that match the performance of an index, rather than ‘actively managed’ funds where star managers pocket millions of pounds individually – But where the evidence shows that almost none consistently beats the index. In addition, it does not have to pay dividends to shareholders.
Since its inception, Nest has attracted 1 million members. Private pension companies have started cutting costs, but few compete with Nest. From next April, they will be dragged (and they are already screaming) by Steve Webb into a new regime that prohibits them from charging more than 0.75%.
Fees matter. A person earning £ 20,000 would save around £ 35,500 over their lifetime if they saved in a program with a 0.75% fee versus a 1% fee, and much more if they were is in Nest.
Standard Life has reportedly already budgeted £ 160million and Scottish Widows £ 100million to face the cap – but few will shed tears for their shareholders.
Nest isn’t perfect – as Hargreaves Lansdown’s Tom McPhail points out, aside from its 0.3% annual fee, it has an upfront fee of 1.8%, which means it’s more expensive than others though. the member begins, for example, at its beginnings. 60s and not going to contribute long. And while it’s super cheap for people hoarding their savings, it offers very little for the new world of “decumulation” – where you’ve withdrawn money during your retirement.
But even with the up-front charges factored in, long-term savers will face charges that amount to 0.5% per annum, a third lower than private providers under the new cap. If you’re self-employed, Nest is pretty much a given. For many small and medium-sized employers, it compares extremely well to private companies.
It is also another antidote to the neoliberal wisdom that private companies = good and public companies = bad. East Coast, the railway company, has cut journey times, carried more passengers and achieved greater customer satisfaction since it became public property. Scottish Water, which unlike providers south of the border is a state-owned company, has over the past 10 years gone from charging more expensive water than its neighbors to the south to £ 54 less in 2013-14. It doesn’t have private equity owners or infrastructure fund investors to stay happy.
What Nest, East Coast, Scottish Water, John Lewis and Nationwide building society show is that public or jointly managed business models can more than effectively deliver services that match or outperform private companies – even if we don’t. we may not wish to dwell too much on the experience of the Cooperative Bank.