Who is stealing the pensions of British workers?

The trade union movement is on a collision course with the Government for a winter of discontent, but the real problem lies neither in Westminster nor at Congress House, but in the City of London.

Earlier this year, the women of Britain received terrible news, no, not that Prince William bats for the opposition, his new bride might have something to say about that. The news was far, far worse, women are finally to be granted full sexual equality, in the pensions stakes at least, by having eventually to work a full six years longer before qualifying.

Unsurprisingly, this provoked an uproar. Of late, things have gone from bad to worse with poor Ed Miliband stuck in the middle as he was booed at the TUC Conference for expressing a dissenting opinion. The Government is adamant that it wants to and is going to “reform” the pension system, and the unions are adamant that they aren’t having any of it. A reformed pension is a bit like a “new” train fare. The train operators never say increased, and the increase here on pensions is for contributions paid and years worked by the people. Having said that, something must be done, but is more money out of people’s pockets and more years worked really the answer? To find the real solution, we should look to another member of the aforementioned Royal Family, Prince William’s younger brother.

Earlier this week, a securities firm raised millions for worthy causes by donating its fees for a day to various charities. As part of its annual Charity Day, BGC recruited a number of celebrities, including Prince Harry, to man the phones for a day. The Prince set a world record for the largest ever foreign exchange deal - €18 billion. Last year, the event which includes BGC’s offices around the world, raised over $10,000,000.

That massive sum represents the fees earned and commissions charged on the company’s dealings, which includes shares, Eurobonds, options, and the aforementioned foreign exchange dealings, among others. These fees and commissions come largely from “institutional investors”, among them, pension funds. The largest pension fund in Britain is said to be the British Telecom Pension Scheme. Currently, this fund has 8 trustee directors, but it is actually managed by Hermes Real Estate Investment Managers. In 2002, Hermes were paid £4.7 million as the British Telecom Pension Scheme ran £6.3 billion into the red. The Chief Executive collected £748,247 including a £327,965 bonus.

Another investment director received £501,414, including a £323,920 bonus. Another seven directors each “earned” more than £250,000.

Yes, you read that right, they lost their clients’ money, and were paid bonuses for so doing. Nice work if you can get it.

Fund managers who actively manage the portfolios of their clients are in effect little more than gamblers, with the caveat that they are gambling with other people’s money, and will be rewarded whether they win or lose. Who wouldn’t like a job like that?

Imagine how popular Internet poker would be if players were paid hefty bonuses even if they lost? A better analogy is with Internet roulette, because in a poker tournament or cash game, while the house takes its cut - a rake or a tournament fee - at least one player always wins. At roulette however, there is no guarantee that any player will win, in fact with the house percentage it is more or less guaranteed that even the smartest of players will lose in the medium to long term.

Pension funds do have one very big advantage for their members, tax relief, but much or all of this is eaten up by the various unavoidable costs and charges that are added on. This article on bank rip offs should give the reader some idea of the extent to which management fees eat into the capital of managed funds, including pension funds. The incident with the parrot is extremely instructive, in which the bird using its beak to pick out stocks came third of eleven competitors.

So what do we learn from all this? If one company earns $10,000,000 per day in fees from fund managers, and these same fund managers are being paid enormous bonuses for, in effect, shuffling around pieces of paper, workers would be better off managing their own pension funds and buying a packet of bird seed each week.

The British Government has in fact set up a state pension scheme called NEST, but unfortunately, this too appears to be managed by “professionals”. It would do far better to alter this scheme to allow people to actively manage their own portfolios, or for those who did not wish to or feel competent to do this, the money could be paid into a central fund which would be invested directly in equities and other investments, and paid out on the individual’s retirement.

To manage a pension fund in this manner, any pension fund, would cost a fraction of that currently paid out to “professional” fund managers. In fact, if the Government were to abolish all managed funds, phasing them out slowly, and were to encourage people to manage their own portfolios, not only individual workers but employers, and indeed the entire economy would benefit enormously. The only losers would be the people who are paid enormous salaries and bonuses to do what the average parrot can do for negligible cost.

[The above op-ed was first published September 15. 2011.]

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