Spotlight on the £600m kickback

THE time has come to get angry and demand answers from the fund managers who handle our pension scheme savings. Of course, they are not to blame for the attrition of pensions caused by the long slump in stock markets, though most declined to share their clients' pain by reducing their fees and many failed to match even the abysmal performance of the market in general.

But now, faced with the prospect that they might lose a £600m-a-year kickback from the brokers who buy and sell shares on their behalf, they have mounted a huge campaign against the half-hearted attempt by the Financial Services Authority to eliminate bundled commissions.

Worse, they have put in these stupendous efforts to resist change on commissions while, for reasons best known to themselves, they are failing to collect about the same amount of our money languishing in the coffers of American courts. The money comes from shareholder class actions against companies and it belongs to the pension funds - us, in other words - by right.

For 12 months now, the Financial Services Authority, which is charged with ensuring that consumers are not ripped off by the City, has been looking into the issue of bundled commissions. This is the means by which money is siphoned from investment funds owned by you and me to subsidise the activities of the managers who are already paid handsomely to look after those funds.

The managers do deals so that brokers who buy and sell shares under the managers' control get inflated commission. The fund takes the hit. In return, the manager receives 'free' research and other services from the brokers with whom these unpalatable deals have been struck.

The fund manager gains. We lose. To misquote economist Milton Friedman, there is no such thing as a free analyst's note.

Briefly last summer, it appeared that the FSA was squaring up for a showdown with the investment firms, which were complaining bitterly that ending bundled commissions would spell the death of small brokers, the loss of business overseas and, quite possibly, the end of civilisation.

Financial Mail reported in December that the FSA was starting to lose its nerve. And last month, Paul Myners, the fund management poacher turned gamekeeper, told a Commons committee that the drive to tackle the issue had 'run into treacle'.

He was right. John Tiner, head of the FSA, signalled to last week's National Association of Pension Funds' annual investment conference that the authority will probably settle for a modest tightening of the rules on what investors are told about the kickbacks received by their managers.

This is a squandered opportunity. In effect, the FSA is accepting that as long as we are told how we are being ripped off, it is OK for the fund managers to continue ripping us off.

The sums involved are not huge in comparison with the overall pensions deficit, but £600m a year is not to be sniffed at. And coming only a month after the Government blamed the Equitable Life debacle on now discredited 'light touch' regulation, the very body set up to make regulation more robust has caved in to lobbying by the powerful forces of the City.

But while fund managers have been putting so much effort into turning the head of the FSA, they have been remarkably supine about collecting more of the money that rightly belongs to British pensioners.

Something in the order of £600m a year should find its way into our pensions courtesy of shareholder class actions, largely in America, but increasingly in Australia and Germany. There is also another £4bn from corporate bankruptcy payouts simply waiting for funds to stake their claims.

The enormous sums follow awards made by the courts on behalf of investors in companies, some like Enron or WorldCom that have hit the skids, but more routinely against giants such as Ford or General Electric. British pension funds do not have to launch the class action, but if they have a shareholding in a company, they are entitled to a percentage of any payout.

All they have to do is apply. Yet, according to Magenta One, a small company that collects these rich rewards for UK investors, most are reluctant to stake their claim. This is perhaps because they do not like to be seen as money-grabbing litigants, or do not want to court publicity, or are simply unaware of the sums available.

Whatever the reason, there can be no excuse in the present climate for pension fund managers to turn their backs on anything that might improve the retirement prospects of their clients.

If they can strive so hard to defeat the FSA's effort to end the feather-bedding they enjoy at our expense, they should at least make some effort to recoup easy money on our behalf.

It is a shameful performance.