A DWP charge consultation built on sand

Without transparency of asset management charges a price cap is a job half done says John Greenwood, editor, Corporate Adviser

It is heartening to see the FCA take on the serious issue of the use of soft commissions for research with its consultation announced at the end of October. We only hope the DWP catches up soon.

FCA chief executive Martin Wheatley has called for greater transparency in the asset management sector, and is demanding a frank and open discussion on how and where dealing commission is spent.

This is an issue that Corporate Adviser has endeavoured to push up the agenda for over a year now so it is refreshing to see it getting airtime at last.

That the DWP can seriously talk about having a debate about charges without getting to the bottom of this and other hidden costs however is a separate matter.

Yes, the DWP consultation into charges mentions transaction costs, but it does not place them at the centre of its consultation. Instead it merely asks whether dealing costs should or shouldn’t be included, and suggests that revealing them might put people off, so maybe we shouldn’t bother with something so complex.

Its not a question of consumers not knowing, providers don’t know, and nor do pension providers or the Pensions Regulator. Surely that should be a cause for concern at the DWP.

I have no idea whatsoever of the actual charge on my workplace scheme. It is with Aviva and has a very generous 0.3 per cent AMC, at the expense of leavers charged a cap-friendly 0.7 per cent. But I do not know how much disappears in fund management charges because the insurer won’t tell me, even though I have asked. This is no especial dig at Aviva – pretty much all the providers are the same. Nobody discloses full transaction costs, even when the media asks. That makes me think there is something somebody doesn’t want us to know.

The DWP consultation makes no specific mention of portfolio turnover, Forex costs, stock lending, interest on cash balances, not to mention research and other asset manager services paid for through soft commissions. Yet Frost Consulting estimates around £1bn a year is taken out of client account monies – yes, auto-enrolment savers’ pots as well – through soft commissions alone.

Few would suggest that fund managers should be stopped from selling a stock they expect to fall off a cliff for fear of breaching the AMC spend for the year.

I have no problem with a fund manager spending 6bps on a broker fee, plus stamp duty, to get my pension fund into a better stock. I do mind if they spend 13bps on a bundled broker fee for the same transaction, and then get the benefit of 7bps of my money to spend on their research, when that should be paid for out of their P&L and reflected through the AMC.

We want to see fund managers required to disclose profits they make from executing transactions in a particular way. And that these extra costs should be added to the AMC for the purposes of calculating whether the fund has breached the cap, whatever it may be.

DWP argues that too much detail could put people off saving. That sounds like avoiding difficult conversations with asset managers.

Without full transparency on fund management costs plans for a charge cap are a job only half done.