Ed Miliband, the leader of the Labour party has attacked pension charges, stating that companies are ripping off long-term savers with high fees.
The Labour leader, said that pensions will be the next major scandal, on a similar scale to phone-hacking and banking. His challenge to the ‘rip-off’ pensions companies came at a Westminster lunch, where he presented both Which? research on fund charges and House of Commons research into the issue.
Research from the Commons showed that with an average annual charge of 0.5% an average £50 monthly contribution would give you a £32,398 pension pot in 40 years. But if that annual charge increased to 4%, your pension pot would be halved to £15,964.
High charges eat into your returns
Miliband’s statement on pension charges was partly based on research carried out by Which? in October 2011, which exposed the cost of trading within retail investment funds, and the impact that this can have on the overall annual costs you pay.
The extent to which a fund manager buys and sells shares in their fund is known as the portfolio turnover rate (PTR), and is calculated and expressed as a percentage. If a fund has a PTR of 200%, this means all the shares held by the fund at the start of the year have been sold and replaced by the end of the year (100% sold, plus 100% bought).
Which?’s investigation into PTR found that a fund with a turnover rate of 200% adds an extra 0.66% to your annual charges. We also found that funds investing in UK companies have an average turnover rate of 108%.
Action point: Find out more about our research into portfolio turnover rates and trading costs in investment funds.
Is high turnover a bad thing?
You would expect a higher level of turnover in an actively managed fund as that is the style of management – you are paying for your fund manager to make active decisions on your behalf.
Which? research found that some funds with a high turnover underperform their peers. The Marlborough UK Large Cap Growth fund has a PTR of 576% (which, by our calculations, would increase its TER from 1.51% to 3.41%), yet underperformed FTSE All-Share Index by 7.2% in its measured period.
However, others with high turnover did make up the extra cost in performance. The Neptune Mid Cap fund, which had a PTR of 532% (adding 1.75% to its annual cost) beat the FTSE All-Share by 5.5% over its measured period.
However, most fund providers don’t publish historic PTRs, so it’s difficult to ascertain the long-term impact of a high turnover.
Which? wants action on pensions
Which? believes that the government needs to take greater action to ensure that all pension schemes used for automatic enrolment offer good value for money and have transparent charges. Which? wants to see clearly defined minimum standards to protect consumers from being automatically enrolled into poor value schemes.
In addition, we think that there’s simply no justification for charging higher fees for members who have left a pension scheme because they have changed employers. Over a number of years, this really adds up and could knock as much as a quarter off your income once you retire.
- Want to know more about pension saving? – Introduction to personal pensions
- Are fund charges eating into your returns? – Find out about the costs you’ll pay for your investments
- If you want to speak to a money expert – Call the Which? Money Helpline