I hope Sir Howard Davies isn't having second thoughts about reforming the over-cosy relationship between fund managers and stockbrokers. The chairman of the Financial Services Authority admitted the other day that his proposals had caused "fluttering in the dovecotes", and hastened to reassure the City that he would not rush any final decision. The chief City regulator wants to shed some much-needed light on the way fund managers are paid by pension funds. In effect, a whole bunch of goodies enjoyed by fund managers - some legitimate, some not - are indirectly paid for by millions of ordinary pension-fund members. There are two problems. One is so-called "bundling" - the practice of stockbrokers charging for all kinds of services under a single commission figure, paid for by pension funds. The other is soft commissions or "softing" - the practice by which brokers give perks to fund managers in return for the promise of an agreed volume of business at an agreed commission rate.
Davies wants to force the industry to "unbundle" commissions so that pension funds and their members can see what they are paying for. It won't be a pretty sight. Unbundling, says the maverick fund manager Bedlam Asset Management in a letter to clients, will reveal all kinds of unjustified expenditure. With tongue only partly in cheek, Bedlam says: "For those who do not understand what the key functions of a broker are, in order of importance they can be ranked thus:
"i) buying the fund manager lunch;
"ii) making the fund manager believe he is an interesting person;
"iii) taking the fund manager to a variety of on- and offshore venues for in-depth analysis including Ascot, the Americas Cup, the Monaco Grand Prix and conferences in Asia;
"iv) executing orders in stock markets;
Fund managers spend £2.3bn of their pension-fund clients' money on commission each year. Of that, as much as 40 per cent is for services other than securities dealing, according to Financial Services Authority figures.
Almost all occupational pension funds are hugely in deficit. The total shortfall is now put at around £100bn. Employees and employers are having to make serious sacrifices to plug the gap. In some cases, workers are being asked to chip in more and to work for years longer. Woolworths, which employs 30,000 people, has just lifted the retirement age from 60 to 65 for new recruits. Hundreds of traditional "final salary" schemes, which more or less guarantee a decent pension for long-serving workers, have been ditched in favour of cheaper "money purchase" schemes, which guarantee nothing. In such a climate, it is unbelievable that employers and employees are still inadvertently shelling out for all kinds of unnecessary expenditure, be it jollies to lap-dancing clubs or equity research of dubious quality and objectivity.
True, fund managers have begun to tighten their belts. Dick Saunders of the trade body, the Investment Management Association, which is lobbying hard to preserve the status quo, says: "Every fund manager I know has been cutting costs like crazy for at least a year." I heard the same sentiments a few weeks ago from a major fund-management house, when I was lunching in its dining room. It was being voiced almost at the very second (I swear to you) that the fine burgundy and caviar were wheeled in.
The pointy-heads are in a lather of excitement over Gordon Brown's decision to switch to a new measure of inflation. The Bank of England, which is charged with keeping inflation as close as possible to 2.5 per cent, will soon no longer target RPIX (the retail price index after stripping out mortgage interest costs). Instead it will use HICP - a harmonised index of consumer prices, known as "Hiccup".
Hiccup probably won't make much difference to monetary policy, though it is hard to know for sure until the Chancellor tells us what the Bank's new target is going to be. But as a measure of the actual cost of living in Britain, it will tend to understate the truth even more than RPIX. RPIX strips out mortgage interest costs, but Hiccup removes other housing costs and council tax as well.
The government is likely to use Hiccup to restrict increases in index-linked benefits, employers to reduce perceptions of rising living costs and therefore curb pay settlements.
The truth is, you can't fool people for long, whatever the official statistics may say. Brown found that to his cost when a freak low figure for headline inflation (RPI) allowed him to get away (or so he thought) with giving pensioners a rise of just 75p a week. This niggardly increase lost him brownie points with the grey vote and forced him into a hefty hike the following year.
Patrick Hosking is deputy City editor of the London Evening Standard