Siphoning off investment gains

We should perhaps stand by for yet more market uncertainty when hedge funds are hit by another wave of client redemptions. Yet this is not a primary matter of concern for the majority of British investors - not just those who buy shares, but those who save through personal pension contracts. What ought to concern them more is a release this morning of a report called Tomorrow's Investor - a project backed by the Royal Society of Arts - which points out that roughly 40% of the money people save and invest for their pensions goes in charges to fund managers, brokers and intermediaries.

Unlike Madoff, there is nothing illegal going on here. But as Britain's £1000 billion of pension savings moves from company-operated defined benefit schemes to individually-driven money purchase schemes, we ought at least to note that the sums quietly siphoned off in charges by the investment industry will be far more than even Madoff has managed to squirrel away.

If these charges were added back, or more realistically if charges were reduced to the levels which rule in countries like Holland, which would allow half to be added back, then the returns to savers would be transformed. The pension that these savers would have available when they do retire would be increased by at least a fifth. Saving for a pension would become significantly less of a burden.

The investment industry may well protest that the figure is a gross exaggeration, but it is not. Not only is the Tomorrow's Investor research sponsored by Invesco Perpetual and PricewaterhouseCoopers - organisations that both know their way around the investment world - it also drew heavily on the expertise of people who spent working lifetimes in the business.

It also tallies very closely with the anecdotal evidence one frequently hears from savings specialists in unguarded moments. It is widely accepted by these professionals that the return to pensions savers comes from the tax relief the savers get on their contributions. All the investment gain is eaten up by professional fees and charges.

The report levels another charge that should make the industry just a little uncomfortable.

Madoff was notoriously secretive, to the level almost of absurdity. But according to Tomorrow's Investor, the UK fund-management industry is also structured in ways which make it very hard for individuals to call the industry to account.

When individuals do try to probe a little deeper they find "fund managers unaccountable and financial institutions opaque". Hence perhaps the next step of the RSA project, which will be to develop a low-cost transparent pension product, if only to show to the industry and the public that it can be done.