DC pension charge gap persists despite falling fees

Industry organisations have backed regulators' plans to include all defined contribution (DC) pension schemes in their proposed value for money framework, after research revealed that a charge gap remains in the DC market.

Research from the Pensions Policy Institute (PPI), sponsored by B&CE, found that whilst the level of fees has been driven down in recent years for those outside of the scope of the cap charge, a charging gap between non-capped and capped arrangements remains.

The research showed that most default investment strategies charged below the cap, eroding a typical pot at retirement by 14 per cent, a quarter less than the impact of charges at the cap.

Charges at the level of the cap, meanwhile, which are likely more indicative of individual personal pensions, were found to erode retirement savings by around 20 per cent, while personal pension charges were “even higher”.

It also found that members of non-default investment strategies and self-invested personal pensions may incur higher charges, stressing that members would need to realise additional benefits, such as a wider range of assets to invest in, to offset these higher charges.

In addition to this, the report suggested that providers of schemes designed for pot consolidation are advantaged by not being subject to the cap, and can therefore charge more than automatic enrolment schemes.

However, it again warned members of these schemes may be disadvantaged by incurring higher charges unless they see other benefits, such as higher returns.

The findings also suggested that a combination of de minimis pot size of £100 for flat fees and a larger proportion of pots leaving automatic enrolment providers for consolidator vehicles could disadvantage automatic enrolment schemes by reducing value for money.

The PPI explained that flat fees would reduce the need for cross-subsidisation from members with larger pots to those with smaller pots, which for schemes that have a larger proportion of small, deferred pots will place additional pressure on the cross-subsidisation of these pots.

Despite the recent industry focus on costs, however, the research suggested that scheme selection by employers is not primarily driven by charges, with members also not generally engaged with charges or motivated to transfer due to charges, instead being primarily concerned with the potential investment performance.

Commenting on the findings, PPI head of modelling, Tim Pike, said: "The charging gap between automatic enrolment schemes and those outside the scope of the charge cap has reduced in recent years primarily driven by competitive pressure, the role of regulators and improved oversight by with independent governance.

“However, there is still significant variation in the charges levied by schemes outside of the cap.

"Schemes outside the scope of the charge cap may offer a wider variety of benefits, such as increased investment options. However, consumers will attempt to keep decisions simple rather than engage in the trade-off between benefits and charges.

“If they do not realise these benefits, they will only be worse off with higher charges."

Pike also noted that while the government has not taken any policy decisions regarding the proposal to introduce a single permissible charging structure, it is considering next steps, suggesting that such proposals ought to introduce greater simplicity and easier comparisons across that market.

“However, it will widen the dichotomy within the wider DC market between schemes designed to serve automatic enrolment savers and schemes operating outside of the charge cap which are designed around existing savings being transferred in," he warned.

“This will alter the balance of how different schemes provide value for money for their members.”

Adding to this, B&CE, provider of The People’s Pension, director of policy and external affairs, Phil Brown, highlighted the research as demonstration of how significantly charges can impact retirement incomes.

"With charges generally lower in workplace pensions than in retail, for many people thinking about transferring out of lower cost workplace pensions, it would be better to stay put," he continued.

“But value for money is about more than just charges. The FCA and TPR are right to propose a value for money framework that covers all of DC pensions, as savers should be able to examine the value for money offered by both workplace and retail pensions.

"It will be tough to fine tune, but it will provide real transparency to both professionals and savers.”

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