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Pension charges, pension caps and technology

Pension charges, pension caps and technology

Through the looking glass and the charges Alice found there…

When Lewis Carroll wrote his sequel to Alice in Wonderland, Through the looking glass and what Alice found there, there was no such thing as a pension industry, never mind pension charges, but it seems that Carroll was prophetic in the way he forecast people would look at these things. In through the looking glass everything is reversed from the normal world, a mirror image, if you like, and so time goes backwards, you have to run very fast to stay in the one place and cake must be handed around first and cut into slices afterwards.

It sometimes feels that we’ve gone through the looking glass with the pension charges debate. The entire focus has been on the effect of the charges on the incomes of the pensioners. Very worthy and, no doubt, very good in terms of getting votes from the consumers of financial products come election time but surely when it comes to working out pension charges, we should start at seeing how much it actually costs to administer pension funds.

Instead we are hearing endless debates about the long-term reduction in funds caused by charges. The uninitiated, if they were listening into the debate, would be led to the conclusion that the only thing that matters is the charge level and that greedy advisers and providers are robbing them of tens of thousands of pounds, whereas the actual amount being received by these guys is only a small fraction of the amount. It’s just that the rolled-up effect of those charges is highly significant – although the rolled up cost of money one blew on a foreign holiday instead of putting into your pension would also be a staggering amount, way above the actual cost of the holiday.

Oscar Wilde defined a cynic as someone who knows the price of everything and the value of nothing. In the pensions world, it is hard not to feel that the cynics are those who know the charge for everything and the value of nothing – particularly in terms of high fund growth achieved or good service levels.

Why aren’t we looking at pension capping from the point of view of the costs involved? Is it that the technology doesn’t exist to establish those costs? No. There is no doubt that with current technology, it is possible to work out on an individual policy level, the costs associated with the administration of each policy.

And how come the figure that is being bandied around is the suspiciously round figure of 0.5%? Where did this magic figure come from? It feels like a figure that’s designed more for its effect on the public rather than being based on any realistic assessment of the cost of providing the service. Of course, if you project 0.5% forward, and it will still seem to most customers that their pensions are being reduced excessively for very little service.

Competition is the only thing that will prevent cartels and price fixing but true competition cannot happen until it is made as easy to shift your pension, as it is to change your broadband or energy provider. Price capping favours the established players as most of their structural costs are already sunk whereas it would be difficult for any start-up to put the infrastructure together without the ability to charge for it, as price capping would prevent consumers choosing to pay more for what they perceived to be a better product or service.

There is a danger that price capping could help the older companies resist the encroachment by newer companies with innovative ideas and practices. This could be the worst possible outcome for the consumer in terms of value, whatever about cost.

In Through the Looking Glass, Humpty Dumpty may be able to make words mean whatever he wants, but in the real world cost and value are not synonymous.

Illustration by Peter Newell

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

Google Plus: TomMurray

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