Banks are levying high currency charges and that's hurting our pensions.
Rip-off currency rates are costing Britain's pension savers almost £300 a year, according to calculations from curency analysts New Change FX.
Collectively this is costing £7.5 billion a year.
How the currency rip-off works
Put simply, banks routinely manipulate their charges for dealing in currencies, boosting their profits at the expense of every person in the UK.
The first stage of this rip-off is that fund managers are routinely overcharged when exchanging sterling for foreign currencies to buy shares, or when selling foreign assets and converting the proceeds back into sterling. The second, and bigger, stage of this rip-off is more complex.
When buying, say, foreign shares, many fund managers hedge (meaning reduce or limit) the risks of exposure to foreign currencies, such as the US dollar, Japanese yen or the euro, by buying derivatives. These contracts act as a type of foreign exchange insurance, reducing losses from sudden or adverse currency movements.
These hidden FX costs add only a tiny fraction to the cost of each trade. However, thanks to the vast size of the FX market, with $5 trillion (£3.2 trillion) traded on the currency markets every day, they add up to a monstrous sum.
Andy Woolmer, managing director of New Change FX, calculates that banks should charge 0.01% to 0.02% per FX trade to cover their dealing and other costs and produce a small profit. Instead, banks routinely charge up to 10 times as much for these trades, charging around 0.11% per FX transaction.
Of the foreign shares and other assets held by British pension funds, almost two-thirds are hedged against currency risk. According to New Change FX, this means that at least £7.5 trillion of 'background' hedging FX trades are carried out each and every year.
[Related story: 'Hidden' investment charges criticised]
What this means for your pension pot
Woolmer calculates that with reasonable and fair pricing enforced, FX trading would cost each British pension pot around £28 a year. With 27 million policies in the UK, this totals £756 million a year.
However, the actual cost per pension pot comes to around £308. In other words, this FX rip-off is skimming off £7.56 billion a year from British pensions, or an extra £280 per pot.
Over, say, the 40-year lifespan of a pension, losing £280 a year in unfair FX charges adds up to £11,200. This is a huge sum for any saver to forfeit, especially when it is lost in hidden charges purely designed to boost bank profits.
Woolmer says that many fund managers overseeing these assets are completely unaware of this routine currency overcharging, while normal investors are similarly in the dark.
It's obviously a good thing that the Financial Conduct Authority is taking action on the banks which have allowed bands of rogue traders to rig world currency markets. Now it needs to take action on the even bigger currency scandal that's still going on.
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