A RECENT article from, Bloomberg News noted that “the investment industry has reached one of its biggest milestones in its modern history, the milestone being that in the years since the financial crisis US money flows to passive equity funds have now surpassed those to their actively managed equivalents.

Whether referred to as passive, tracker or index funds, the meaning is the same: the objective is to replicate the performance of a market index rather than attempt to outperform the market by picking and choosing particular investments, as active managers attempt to do.

One of the main attractions of passive funds is their low cost. Here in the UK, the average annual fee for a passive equity fund is 0.15 per cent whereas the average annual fee for an actively managed equity fund is 0.9%. By keeping more of their returns through lower fees, it is easy to understand why passive funds have struck a chord with investors and why momentum continues to grow.

Evidence that suggests the actively managed funds available to retail investors persistently underperform their benchmarks after costs, as reported in the Asset Management Market Study, also adds to the attraction of passive funds.

Here in the UK one would imagine that there is still plenty of growth potential for passive equity funds as the majority of the market is actively managed - only about 20% of total assets sat in passive funds at the end of 2018. It is therefore no coincidence that US passive fund giants Vanguard is set to launch its low-cost pension in the UK this year. It is not too much of a leap to suppose that a disruptive influence on the status quo could be on its way.

While a full debate on active versus passive styles is for another time, any catalyst that might increase consumer engagement towards pensions savings, particularly around scrutinising the charges being incurred, is to be encouraged.

The public’s inherent inertia towards pension savings, and the effectiveness of competition in the interests of consumers, are not lost on the Financial Conduct Authority (FCA), the regulator of non-workplace pensions. In July the FCA published its findings after undertaking a data gathering and analysis exercise to determine if previously identified weaknesses found in the workplace pensions market also existed in the non-workplace market.

Despite some fundamental differences between both markets, the regulator found that they shared key similarities - low levels of consumer engagement, highly complex charges and little switching between pension products - that lead to weak competitive pressure.

Crucially, it was found that broadly similar consumer groups are paying materially different charges for broadly comparable products. In the extreme, it was estimated that over the length of a pension-savings journey the impact of paying charges at the bottom of the range rather than the top of the range could make a difference of over £10,000 to the final value of a pre-2001 pension pot.

The good news is that the regulator is considering several potential remedies aimed at supporting greater competition in the market. These include making greater use of comparable pounds and pence charges figures - a requirement for annual decumulation statements to be introduced from August 2020 has already been announced - as well as presenting all charges within a limited number of charge categories. This is designed to help consumers see exactly what they are paying for any particular product.

Also under consideration is a requirement for firms to regularly report standardised charges data for the purposes of making a single data set available to the public. More scrutiny could also lead to more challenges to ad valorem charging models. The obvious criticism here is that such structures are not cost reflective. Simply put, why should one client be charged more than the next for exactly the same product or service, just because they have more savings?

While there is some justification for cost to be reflective of the complexity and the transaction value for certain services, the giving of financial advice being an example, the same arguments do not ring true for a pure administration service. Surely any consumer told they were subsidising the pension administration costs of other customers would want a compelling reason for that being the case. Telling them “that’s just the way it is” would be very unlikely to cut the mustard.

Whatever the regulator decides, and whether the continued rise of passive funds sparks greater cost scrutiny, everyone - regulators, providers and advisers - has a role to play in helping pension savers keep their charges as low as possible.

Lee Halpin is technical director at @sipp.