Pensions hit the headlines in the UK this weekend, with the news that Chancellor George Osborne has shelved a plan to reduce tax relief on savings in his forthcoming Budget.
It’s not a debate I want to get into. Suffice it to say that this latest about-face is hardly going to inspire public faith in the pensions system; to quote Jeff Prestridge in the Mail on Sunday, “pensions policy in this country now resembles a fine Alan Ayckbourn farce”.
It’s good, of course, that we are at least talking about pensions and the savings crisis facing the UK and pretty much every other country in the world. What I do find odd, though, is that commentators never seem to look at the bigger picture.
In the 2013/14 tax year, the gross cost to the Treasury of registered pension scheme tax relief was £35 billion, which by any standards is a colossal sum. In this age of austerity, when the use of public funds is exposed to an unprecedented level of scrutiny, why does no one stop to question whether we, as a country, should be shelling out that sort of money every year? Why does nobody question the value that the taxpayer receives in return?
Don’t get me wrong; most people aren’t saving enough for retirement and the Government is right to encourage them to put away more. But just as important as how much we’re putting into our pensions is how much the industry is taking out. The evidence clearly shows that, after costs, actively managed funds — the default investment vehicle for most UK investors — tend to extract value from the investment process. So why are we shelling out £35 billion every year on pension tax relief when most of that money will end up in high-fee funds that underperform the index?
Tax relief on savings is, effectively, a vast public subsidy for an industry that really doesn’t need it. As a sector, asset management is awesomely profitable, a fact reflected in the huge financial rewards on offer to those who work in it. Michael Dobson, the new chairman of Schroders, for instance, has taken out £39 million in salary and bonuses since 2005 as well as accumulating an estimated £9.2 million in share options.
As another Mail journalist, Alex Brummer, wrote the other day: “What makes this (excessive pay) egregious for people who manage assets is that they directly or indirectly work for ordinary citizens – some with very limited savings built up over a lifetime of careful husbandry.
“Excess in this world is inexcusable and is among the reasons why populist politicians, who rail against the City and Wall Street, have such strong resonance in the post-crisis world.”
Gallingly, pension tax relief isn’t the only public subsidy that the UK fund industry receives. Two years ago, an independent report on the Local Government Pension Scheme, commissioned by the Department for Communities and Local Government, found that the fund managers employed by the LGPS were failing to provide value for money for the tax payer.
The report’s authors found that in 2012, the scheme’s costs amounted to £790m — the vast majority of which was paid to active fund managers. Using passive equity and bond funds instead of active ones would save the tax payer about £230 million a year. There would also be a saving of another £190 million a year in transaction costs.
Powerful vested interests in the City have lobbied hard against the recommendation in the LGPS report that the Scheme moves away from actively managed funds. The fund industry also has much to lose from a reduction in pension tax relief, and doubtless it had some influence on Osborne’s U-turn too.
Ironically, asset management, an industry that famously thrived under the premiership of Margaret Thatcher, is the one industry that has yet be subjected to Thatcherite reforms. Like the British car industry in the 1970s it’s become bloated, uncompetitive and ill-equipped for a fast-changing world.
Given the significant contribution the City makes to Conservative Party coffers, it would take a brave Tory Chancellor to insist that tax-payer funded contributions to personal pensions are invested in low-cost index funds. But such a move would hugely benefit savers. It might also provide the kick up the backside the fund industry desperately needs.
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Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
