Check those management charges and pay less for your pension

THE bloated charges paid by pension savers on mediocre investment funds have hit the news again and will continue to do so regularly for as long as fund management is a profitable calling.

David Pitt-Watson of Hermes Fund Management, which runs pension schemes including BT's, this week claimed high charges mean UK savers are retiring with pensions half the size they would have received in Europe, given the equivalent investments. He particularly highlighted the 0.4 per cent charges on pension funds in Denmark, conveniently omitting to mention that whereas UK investors typically use active funds, the Danish system is geared more towards tracker funds. A like-for-like comparison would have been more credible.

That the story was in a paper with a burgeoning track record for setting the stage for coalition policy announcements was no coincidence, with the government currently knee-deep in pension reviews.

But the broader point regarding charges is no less valid for that. Smart Money has regularly highlighted the extent to which pensions savings are eroded over the long-term by fund management charges bearing little or no relation to performance. The mark-up may not be obvious when markets are flying, but when they are not the impact of a 2 to 3 per cent annual charge is far more noticeable.

Earlier this year we revealed that investors in underperforming investment funds run by some of the UK's biggest banks pay more in charges than they get in returns. Many investors underestimate the extent to which charges can eat into their returns, ultimately reducing the money on which they intend live in retirement, but investor apathy means firms continue to get away with it, raking in easy millions without producing the required performance.

Yet high charges can be easily avoided. For instance, the fees on trackers and exchange traded funds are a fraction of those on most unit trusts, as are those on investment trust charges, to a lesser extent. The latest figures from the Association of Investment Companies show that more than a third of investment trusts have total expense ratios (TERs) of 1 per cent or lower, less than half of the TERs levied by most unit trusts.

But many investors are effectively frozen out of investment trusts because their financial adviser doesn't know enough about them. New JP Morgan research suggests an astonishing four in 10 IFAs admit to avoiding investment trusts because they don't know enough about them. Another 33 per cent said they don't recommend them because they don't pay commission. But if the latest charges furore succeeds in driving home that investors are paying too much for mediocre funds, investment trusts stand to benefit.

Avoiding investment trusts because of commission and low awareness is an abdication of an adviser's duty to treat customers fairly. The good news is that this is set to change. Under the Retail Distribution Review - reforming the delivery of and payment for advice - advisers will from 2013 no longer be allowed to accept commission from product providers on the sale of products.

The so-called literature sent out by pension companies is usually indecipherable, but millions could make significant savings if they take the time to look not only at how their personal or workplace pensions are performing, but how much they are paying for them. Until then, investment and pension firms will get away with being rewarded for mediocrity.