Suffocatingly high fees mean nine out of 10 would lose more in benefits than they would get from their pension savings
As public sector workers protest about proposed changes to their pensions, many people in the private sector might be looking on with envy as they compare their likely meagre pensions with the supposedly gold-plated public sector final salary pension schemes. But the real burning question in this comparison is not envy, rather: are private sector pensions so small because workers are being overcharged by the companies running their pension schemes?
For a book project on the British financial industry, I recently compared the fees paid by pension scheme savers. British pension scheme charges average between 2-3% a year ? which may seem small. But when you take into account that most British pension funds have only managed growth of around 4% a year over the last 30 years, charges of two per cent or more mean that most of those who save in private sector pensions will see between 50 and 75% of all the growth in their pension savings disappear to pay those who have sold them their pension schemes and those manage their money.
I calculated that pension companies are taking over �80m every working day (�20bn a year) in fees and expenses from people saving for private sector pensions. These unwarranted high takings make it almost impossible for private sector workers to build up sufficient money to retire with a reasonable pension income. Only a consistently roaring economy over 30 years would save the British private pension holder. A simple example illustrates the problem. If you had invested �100 in Warren Buffett's company from the start you would now have stocks worth �300,000. But if you had invested it in Warren Buffett through a British pension fund you would have just �30,000 because of fees and charges.
The suffocatingly high fees taken by pension companies mean that eight out 10 private sector workers have less than �30,000 saved up by the time they retire. This would give them an inflation-linked pension of about �1,000 a year in addition to their state pension (if still in existence at their pensionable age). One out of 10 has between �30,000 and �50,000 in their pension fund, giving an income of around �1,750 a year. And just one out of 10 has more than �50,000. This makes saving for a pension pointless for nine out of 10 private sector workers as they would lose more in pension credits and other benefits than they would get from their pension savings.
The government is keen to point out how generous public sector pensions are compared with what someone in the private sector can expect. But perhaps our politicians are trying to deal with the wrong problem. Instead of cutting public sector pensions down towards private sector levels in a "race to the bottom", perhaps our leaders should be investigating why private sector savers are paying such huge sums in fees and commissions to pension companies and their very well-paid managers.
Unfortunately, as I show in my book, this is but one of the ways in which the British financial industry charges for its modest services at a level that is palatial. Luckily for them, our politicians are immune to any worries about their own wellbeing in retirement. The pension an MP will receive amounts to around �50,000 being paid in every year and nearly double that for a government minister. While lecturing us about the need to control public sector pensions, government ministers and MPs keep very quiet about the fact that they have probably the most generous pension scheme in Britain.
Source: http://www.guardian.co.uk/commentisfree/2011/jul/01/private-sector-pensions-savings
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