Panorama, Pensions – and a sense of proportion

It would be fair to say that the BBC Panorama programme, screened on 10 October 2010, caused a bit of a stir.

It implied that pensions are, in effect, a rip-off.

The reason for the suggestion was the programme’s finding that, in some cases, over two-thirds of the money paid into a pension plan is taken in fees and commission by the provider and the seller respectively.

And it highlighted the case of one HSBC pension plan, where £120,000 was paid in over 40 years while fees and commissions accounted for nearly £100,000 – over 80 per cent of the contributions.

At the Welbeck Group, we think this is misleading, unhelpful and sensationalist.

Now of course we would think that, wouldn’t we: being in the financial services industry and having a sizeable team of people providing pensions advice. But let’s look at this argument a bit further.

Let’s leave the size of the fees and commissions on the side for a second, and ask this question: should pensions have to bear any such costs?

The answer to that is, undoubtedly. Pensions are a service like any other: and as with all services, there’s no such thing as a free lunch. To buy a pension, you go to a financial adviser with specialist knowledge of that market, who will evaluate your needs using considerable skills and technology, then recommend from the market a pension plan that best matches your needs.

It would seem reasonable that this work is rewarded – otherwise there would be no pension advisers. People would have no professional guidance about how much to invest for their retirement, whether it was going to be adequate, and so on.

Now, as to fees. Once the pension is set up, it must be administered and invested. It must be managed, in fact. The object here is to enable the pension pot to grow over the years. Again, it seems reasonable that this work is rewarded, and that pension investors get the services of the best fund managers and administrators.

Panorama might agree with these arguments, but still insist that the amounts involved are excessive. But by looking at a static picture, the programme produces a totally erroneous picture of what’s really happening.

Yes, if someone kept putting money under the mattress for forty years and found that two-thirds was missing at the end of it, they might have cause to be aggrieved. But this is not what happens with pension plans. Any plan that produced zero growth over 40 years of contributions would be a seriously ineffective one!

Let’s take a more reasonable assumption. A man aged 25 starts a pension plan and invests £250 a month. Contributions rise at 2.5 per cent each year in line with inflation. The fund grows at an average of 7 per cent annually. The management charge of 1 per cent is deducted from the growth rate. On this basis, the pension pot at the end of 40 years would be over £240,000.

Obviously, past performance is no guide to future performance and this growth rate is just an example. But it does show a fairer picture of what’s likely to happen when someone invests in a pension plan.

Programmes like Panorama are right to highlight any abuses in financial services. But when they paint a misleading picture like this, they are helping to turn people away from pensions – which are one of the best forms of saving for retirement. Without them, many people might find themselves dependent on the State pension,  something that is not likely to produce the income most people want or expect in retirement.

Not only did the programme ignore any possible growth in the pension fund, it also ignored other benefits of pension investing, such as the generous tax breaks, the return of contributions on death before retirement, and the ability to take part of the pension as a tax-free sum. For all these reasons, Welbeck believes that the programme was misleading and badly thought through.