Pensions World

It pays to be sceptical about solutions offered by financial advisers and to negotiate hard on price says Anthony Hilton, Evening Standard

It is fashionable these days to talk about solutions. Consultants and investment bankers offer them to companies and pension trustees who buy them because they are told that the solution will address a problem.

It does, but it is more often that the problem addressed belongs to the banker rather than the client. Bankers have hungry mouths to feed – huge infrastructures which require millions of pounds in fees and commissions a day just to open their doors. Solutions are City code for high fee products where the complexity conceals the charges. They rarely deliver all of what it says on the tin or do so only part of the time, particularly in the world of pensions where the data on which solutions are based is often partial, incomplete or out of date. It is like a house built on sand. It may not collapse, but with the passing of time it will gently subside so the doors no longer fit, the windows jam and the inhabitants have to live in uncomfortably cold draughts.

Fashionable products

The message from this is not the obvious one which is to refuse ever to buy any solution: they do often have some value, albeit seldom as much as the vendors claim. Rather it is to negotiate fiercely on price and be prepared to walk away in the absence of massive reductions.

In fairness many make the effort or at least approach the challenge in the right mindset. A survey of trustee opinion published last December found that, in general, trustees are suspicious of their advisers’ motives and behaviour and have much more confidence in their own decision making. The poll was carried out by Hamish Wilson, ironically an adviser himself, among delegates at the Professional Pensions show and it found that “a substantial 85 % of trustees believe the best decisions are made by themselves while only 45% are confident that they are not being fed the house view by their advisers. Almost half (47%) feel that advisers often try to sell them “flavour of the month” or fashionable products and solutions which are not necessarily appropriate for their particular pension scheme.

The good news in this, as Mr Wilson observed, is that the drive to improve trustee knowledge and understanding seems to have had an impact. The bad news is that surveys tend to pick up only the most engaged, so the views expressed may not be representative. Scepticism is alive and well at the top end, but it would be a mistake to assume from the sample that all trustees were as alert. Further down, a problem may exist and be deep rooted.

Price quotations

This uncomfortable thought is strongly reinforced by another survey which deals directly with the prices paid by pension schemes, not for bespoke solutions but for everyday actuarial, administrative and consultancy services.

According to Marian Elliott, a director of Atkin & Co, price quotations provided for annual actuarial services from five reputable financial advisers on the same scheme showed a 100% difference (ie the highest was twice the size of the lowest). She also found that in one case where the administration of a scheme was outsourced, it was possible to reduce the annual running costs from £250,000 to just £80,000 with no change in the level of service provided. She also found that fees for a standard item of work, such as the provision of figures for inclusion in company accounts, could range from £3,000 to £15,000 for schemes of similar size and complexity.

So the message seems to be clear. In trusteeship as elsewhere in business life, never accept the opening offer.