IS COST JUST A CLICHÉ?

Cost figures highly when I buy anything. That’s not to say that cheap is best – cliché number 1 “you get what you pay for” – or that bargain hunting is all it’s cracked up to be. There are those who believe that picking up something on sale is tantamount to saving money irrespective of whether the item was a required purchase in the first place; I’m not sure I’d subscribe to that view either. But on the other hand (is that cliché number 2?) I would never buy anything without being happy with the price unless I had no choice (eg, petrol, unless you give up and go by bike.)

Price should be equally important for large financial transactions. But, bizarrely, given that the entire deal is about money, saving pounds and pence does not seem so important. The way prices are quoted – as tiny percentages – certainly contributes to a laissez-faire attitude by consumers. I would not dream of paying a penny more for my mobile phone deal  than I absolutely have to, and I take considerable pride in skimming £5 of my monthly bill by spending weeks shopping around. But when an estate agent quotes me a fee 0.5% lower than their rival for marketing my house for sale I’m not interested, even though it would amount to thousands of pounds in the unlikely event that anybody actually manages to sell it.

In my experience the same is true of the services that occupational pension schemes buy. It is quite routine for pension funds to rack up bills that would seem enormous to one of their members – yet are tiny when expressed as fraction of the total assets and so go unnoticed. Retail investors, though they are often derided as unsophisticated, are actually quite good at complaining about small fees and charges if they are itemised on their bills. I spent hours on the phone last week complaining about what I considered to be an unfair £25 charge on my bank account. Yet when it comes to institutional investing, small annual percentage charges often get completely ignored. That is a real shame, because you don’t need to be an actuary to predict that small annual percentage costs will really mount up over long periods of time.

The mainstream press was full of ‘rip off pensions’ headlines early in the summer, and that was because the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) had politely explained to them how charges of 2% a year will eat up 40% of your personal pension pot over 30 years. The same equation holds for occupational schemes. A £100 million pension scheme growing at 6% a year (remember those days?) if charged just 0.5% a year in fees will pay out £29 million in costs over 20 years. It’s a shocking statistic: that £29m could well be their deficit.

In the good old days (cliché number 3), of which I am only vaguely aware as a semi-mythical period in pensions history, it was perhaps easy to overlook such trifling sums in the face of booming returns. But that was the time of legend; when dragons roamed the land and people left their front doors open (cliché number 4.) Austerity is today’s reality and that means we all have to tighten our belts (cliché number 5). So when trustees are planning their investment strategies and 10-year recovery plans, my suggestion is look after the basis points and the millions of pounds will look after themselves.

[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice.  Click here for full disclaimer]

Author: Bob Campion

Bob Campion is Institutional Business Director of Evercore Pan-Asset, a boutique multi-asset investment manager specialising in managing low-cost diversified portfolios for pension funds. Before joining Evercore Pan-Asset in February 2012, for six years Bob was a trustee sitting on the investment sub-committee of a final salary pension scheme. A journalist since 1998, Bob was the launch editor and later publisher of magazines Engaged Investor and Pensions Insight. He has been a frequent contributor to the Financial Times and investment trade publications and in 2010 was named Trade Journalist of the Year by the Society of Pension Consultants, also winning State Street’s Outstanding Contribution to Institutional Journalism Award.