The markets have spent the last week waiting for disaster. The euro has stayed strong in the rising expectation that it will soon represent Germany and a couple of other hard currency countries. Gold has crept back over $1,800 an ounce. Political chaos has claimed two political scalps – those of George Papandreou and (fingers crossed) of Silvio Berlusconi. And, of course, equities have gyrated all over the place as they wait to see if a systemic banking crisis is to cause a global depression.
But even as these obvious European nasties loom over us, Britain’s financial industry is quietly under pressure from yet another continental threat – the fees charged by the Danish pension fund industry.
This isn’t as dramatic a matter as the collapse of the eurozone, but over the longer term it has the potential to affect the retirements of millions of Britons in just as extreme a manner. Consider the effect of charges on returns. The average UK fund charges something in the region of 1.5% a year of the value of your assets to take your cash. But that’s not the end of the expense. Add non-management costs – those of trading being the obvious one – and the eventual cost is generally much higher.
TCF Investment’s David Norman has done the sums. According to him, the average annual charge in total is more like 2.8%. The effect of that on the value of the average investor’s assets is nasty. Put £10,000 into the market over 20 years and if prices rise at 7% a year (not very likely) you’ll get back £22,770 in 20 years – after expenses. But those expenses will have added up to £15,927 – all of which will now be in the pockets of various fund managers, brokers and lawyers, rather than in yours. It doesn’t have to be this way: in Germany the average management fee is 0.3%.
British fund managers have never been too bothered by international comparisons: even as fees have been falling elsewhere they have been rising in Britain (by around 9% over the last decade, according to The Guardian). That might be about to change. From next year, employees earning more than £7,457 a year must be auto-enrolled in a pension scheme. The government has designed one for this purpose (Nest). Nest is designed to be amazingly cheap by UK standards: those enrolled will pay costs of 1.8% on contributions and an annual fee of 0.3%.
But just because that looks cheap to British managers doesn’t mean these schemes can’t be run more cheaply. Enter Danish pension fund manager ATP. At home its fees run to as little as 0.11% and it’s setting up a competing fund to Nest here, charging 0.3% plus a £18 a year administration fee. That will make it much cheaper than Nest for most investors. How can the Danes afford this? Simple. A cheap office an hour outside Copenhagen and no nutty bonus culture. London managers should take note.