With pension charges back in the news again last week following the governments decision to delay the cap on charges for auto enrolment schemes, perhaps now is a good time to consider value, rather than price. In the famous words of Warren Buffet “price is what you pay, value is what you get”.
Please don’t get me wrong; I am not excusing, nor defending, overly high or punitive pension scheme charges. In fact, I am one of the strongest proponents of better value pension savings vehicles. It does seem however, that in our never-ending quest to make all financial products cheaper, that we have forgotten all about value for money. Surely this should be the deciding factor.
Lets illustrate this with a simple example and assume for a second that both options are similar in terms of risk profile and financial strength. Fund A charges 1.5% per annum and generates a return of 8%, fund B charges 1% but only delivers a return of 4%. All other things being equal, I will choose fund A thank you very much.
Now clearly the above example is quite extreme, but the principle is sound. It should be the value for money of a particular scheme that we are questioning, not the fee itself. Part of any good fund analysis should take into account the level of charges made by the fund manager, and the additional performance that the manager has generated (or, heaven forbid, subtracted) from the fund. Only then can we get a true idea of the value for money that the proposed investment represents.
While the government is right to look into the cost of pension plans for workers under the auto enrolment regime, surely it should be value for money, and not cost alone that is the primary focus of any review.