This website is mainly concerned with trying to reduce churning, ^x "costly and frequently value destroying trading". ^x More generally, in the area of long-term savings: a) as far as possible, people should not be compelled or even encouraged to do things, b) unnecessary activity should be discouraged. A recent (September 2005) example of unnecessary activity is the Equitable Life court case against Ernst & Young which has just been dropped costing Equitable £30 million. ^x

2. Churning

Implicit charges are dependent on portfolio turnover. There are three sources of information about portfolio turnover on this website.

1. The Fitzrovia reports The Portfolio Turnover of UK funds ^x

Fitzrovia has published two reports, in 2002 and 2003, giving the portfolio turnover of UK-based unit trusts and OEICS. The years 2001, 2002, 2003, are analyed for 1354 funds - which is almost all such funds. The 2003 report gives the value of the portfolio turnover for at least one of these years, and often all three.

2. Turnover information given in National Statistics. ^x

National Staistics gives the total market values of the funds of unit trusts, investment trusts, insurance companies and pension funds.

3. The turnover of shares on the London Stock Exchange. ^x

The total amount of trading on the London Stock Exchange shows a remarkable increase over the years.

An aim of pensions policy should be to try to reduce such high turnover. Fund managers are shuffling around shares amongst each other. The FSA recommends the appointment of "investor representatives", ^x who would concern themselves with the resulting dealing costs on behalf of retail investors. This seems to be an unworkable idea. In my opinion the disclosure of portfolio turnover and dealing costs is helpful but inadequate as a way of reducing turnover. Similarly the disclosure of the charges of "products" is helpful but inadequate as a way of reducing charges.

Individuals are not able to adequately negotiate charges with financial companies, even if they know what they are. The topic of dealing costs is hopelessly complicated for retail investors. Consider for example the Pension Fund Disclosure Code. ^x They are outside the stakeholder cap on charges. This is a reason for needing a new national pension scheme.

3. Proliferation

The Sandler Review ^x says that "the proliferation of products" is "a feature of the UK retail savings industry" which "compounds consumer confusion". (3.13) This kind of proliferation is described by the FSA as "innovation". The First Report of the Pensions Commission ^x complains about "contract proliferation" (page 243), referring to people accumulating several policies, which is a different kind of proliferation. This is another reason for needing a new national pension scheme.

4. Lost investments

Investors are expected to seek their lost investments. This is the wrong way round, requiring investors to do things. They may not even realise that they have lost investments. In the first instance investments should seek investors. ^x

5. "Met by a wall of apathy"

The government's informed choice policy for pensions in based on people doing things - becoming informed and making choices. The government is considering whether new employees should automatically become members of occupational pension schemes, so that they have an opt-out option than than an opt-in option. This is a U-turn in approach from expecting people to do things to expecting them not to. This is illustrated by Child Trust Funds:

"Less than a third than of eligible children have had trust funds opened on their behalf. Although 1.7m were sent out, only 499,000 have been cashed... Gordon Brown hoped the scheme would be popular with parents, but he has simply been met with a wall of apathy... A quarter of parents said they didn't even know what they had done with the £250 voucher to open their child's account." ^{x x}

6. Compulsion

The Pensions Commission is studying the topic of compulsion. People may no longer need to decide whether to save but because they will be compelled to do so. It is helpful to distinguish between weak compulsion and strong compulsion. Adair Turner said:

"We know that simply compelling people to save doesn't necessarily fix the cost efficiency problem Australia again is a case in point. They have compulsory savings, but high annual management charges." ^x

This is weak compulsion because there is a large choice of funds, like for example Child Trust Funds or the Swedish Premium Reserve system. ^x Weak compulsion does not fix the cost efficiency problem. ^x There is still something to do, namely choose a fund. Strong compulsion implies that there is little, or preferably no choice of fund - like the Danish ATP scheme. This can fix the cost efficiency problem. If there is only one fund, there is no competition between funds for business. Compulsion seems to be unnecessary if there is a requirement to opt out rather than opt in, with an incentive to stay in.

October 2005