The Guardian Money, Saturday March 2, 2002, page 4.

City banks accused of charges rip-off

Fees charged by City investment banks to pension funds for buying and selling shares are costing the schemes an estimated £8bn a year, it was alleged this week.

The charges rank as one of the major costs of running UK pensions and are the result of deals struck between fund managers and stockbrokers, which are often owned by the same company.

This week Unison, the public sector union, described the charges as nothing more than a rip-off perpetrated by City banks on pensioners, mostly on low incomes.

Local authorities, which employ the bulk of the union's 1.3m members, are believed to be running huge deficits on their pension funds. Several authorities have said they will need to spend millions of pounds topping up their funds with the possible effect that council tax bills will need to rise next year.

Part of the problem has been the huge fees levied by stockbrokers on pension funds, said the union's general secretary Dave Prentis.

A government report published last year agreed that arrangements between the fund managers that dictate how pension money is invested and stockbrokers, who buy and sell shares on their instructions, were too cosy. The report was written by Paul Myners, the former head of Gartmore, one of the largest institutional fund managers in the country, and the chairman of Guardian Media Group, which publishes the Guardian.

He said the commissions charged by stockbrokers should be clearly set out rather than wrapped up in general charge for buying or selling shares. Only then, he argued, would it be clear to pension funds what they were paying for. With this information available they would be in a position to drive down the price.

He also attacked what are known as "soft commissions" but might more reasonably be called inducements to trade offered by stockbrokers. The suspicion is that inducements are designed to lure fund managers away from the best deals to those that offer the best freebies, such as trips abroad, or golf or football matches viewed from a corporate box.

There are many stockbrokers who are prepared to defend the current system and claim it is the most efficient available. They will also dismiss the effect of inducements, claiming the costs are trivial and simply lubricate a "people business" rather than influence trading decisions.

However, the government supported Mr Myners and gave the fund management industry two years to reform the current system.

A consultation document produced by the National Association of Pension Funds (NAPF) and the Investment Managers Association is due to form the basis of the industry's response when it is published later this month in time for the NAFF spring conference. It is unlikely to meet with universal approval as fund managers attempt to cut costs for their clients, the occupational pension schemes, against the interests of the big City stockbrokers.

Unions have asked the government to speed up the reforms and bring forward the deadline from June next year for reforms to be implemented. Unison has called for a further, and more hard-hitting, investigation of stockbroker charges.

Why hasn't the issue been pursued before now? As one former investment manager says: "The high trading costs charged by stockbrokers have been shielded for years by the booming stock market. Everyone was making lots of (money and the charges were) deemed irrelevent. But now the boom is over, share trading costs are thrown into sharp relief."

When there are billions of pounds in charges at stake, the row could be deafening.

Phillip Inman