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Pensions can be delivered at 12% cost - think-tank

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UK - Overseas evidence suggests personal accounts can be delivered for a total charge of 0.5%, according to a study conducted a policy think-tank.

A report published today by the Royal Society for the encouragement of Arts, Manufacturers and Commerce, said evidence indicates that as much as 40% of an individual’s pensions contributions is lost through charges over the lifetime of their investments, even though it might appear that they are only losing 1.5% each year, yet pensions can in fact be delivered at a 12% cost over the life of the plan.

The study compiled by David Pitt-Watson, founder of Hermes Equity Ownership Service (HEOS), argued within the report that the maximum contribution of £3,600 allowed for personal account investment when they are introduced in 2012 in not enough to ensure individuals are not living in poverty in retirement.

“£3,600 is certainly better than nothing, especially for those on lower incomes. However, most pension experts would consider it to be very inadequate to meet the retirement income expectations of those with above average incomes; in other words those who are most profitable to serve,” said Pitt-Watson.

He claimed that by restricting the amount that people can invest, the effectiveness of the personal accounts is “undermined”, adding “its revenues will be lower and hence its profitability reduced”, and is therefore only suited to the government’s target audience - instead of encouraging all individuals to save for retirement - which is also the least profitable market.

While the government has set a cap of £3,600 for personal account annual contributions, RSA quotes figures compiled by Watson Wyatt from February 2008 which claimed a £5,000 a year contribution, achieving an annual return of 7%, should generate a pensions pot of over £472,000 in a 30-year period, albeit this is before charges have been removed, and so argues the system should be opened to allow contributions over £3,600 which do not receive additional employer contributions or tax relief.

Pitt-Watson also argued that an analysis of the costs was also reviewed by APG, the asset manager behind the giant Dutch pension fund ABP, and officials concluded it is “realistic” to argue charges can be set at 50 basis points (0.5%). Under the current retail private pension regime, said Pitt-Watson, “0.5% is a figure most big pension providers will recognise; they run their funds for a similar cost”.

He continued: “The two components that drive up the cost of pensions are marketing and persistency. Of the total amount charged, some 33% is taken on marketing, while a further 38% is the result of low persistency. Less than 30% of the total charge is the result of necessary fund management and administration”.

In response, Maggie Craig, director of life and saving at the UK’s Association of British Insurers, said “the report’s assertion about private pension charges is also wrong - for most people, they deliver excellent investment returns and value for money over the lifetime of the product”.

Whereas private pension arrangements may see competition in the personal accounts regime, Pitt-Watson argued the use of a “social business solution” which allowed other providers to use the Personal Accounts Delivery Authority (PADA) infrastructure for a fee could be “substantially lower than the cost of establishing and maintaining a freestanding system”.

Most of the report also argued that any policy concerning future pension provision ought to heighten the importance of environmental, social and corporate governance, and the role of the shareholder as a long-term investor - an issue which Pitt-Watson is especially concerned about, given his founding position at HEOS.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email

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