Older DC pensions could lose savers 'thousands' - IFS

People with older defined contribution (DC) pensions could be at risk of losing thousands of pounds if they do not move them to new pensions that offer better value for money, research from the Institute for Fiscal Studies (IFS) has suggested.

The research, which used data from Profile Pensions and was funded by Economic and Social Research Council, revealed that many deferred pensions are in schemes with relatively high charges by current market standards.

It also found that whilst pension fees have fallen over time, deferred pensions often do not reflect these changing market conditions.

The average annual fee for deferred pensions taken out in the 1990s, for instance, was above 1.1 per cent of fund value, but this fell to around 0.9 per cent for pensions taken out in the 2000s and to around 0.8 per cent for those taken out in the 2010s.

In addition to this, among those in their 50s with deferred DC pensions, four-fifths of pensions started in 2013 were in a scheme with charges of 0.75 per cent or less, compared with only one-in-four of pensions started a decade earlier in 2003 and one-in-nine of pensions started in 1993.

The report also emphasised that a difference between annual fees equivalent to 0.75 per cent and 1 per cent of funds can have an important effect when cumulated over many years.

For someone aged 50, for example, this can imply a difference of 4.4 per cent in resources at 67 assuming annual investment returns of 7.7 per cent in both cases, whilst for a 50-year-old with a pot of £21,000, this would amount to a difference of £2,000 in today’s prices at age 67.

In addition to concerns over the fund cost, the report warned that the portfolio allocation may no longer be appropriate for savers.

It found that the share of funds invested in equities for deferred pensions started in the last decade was on average 45 per cent among those aged 60, compared with 66 per cent among those aged 50, which it highlighted as consistent with people moving away from risky assets in the run-up to retirement.

However, among pensions started in the 1980s and 1990s, there was no difference in the average equity allocation depending on people’s current age, with those aged 50 and 60 both having an average of over 70 per cent invested in equities.

The IFS suggested that many of these issues could be solved with greater individual engagement with pensions, clarifying however, that this is very hard to achieve, warning that initiatives such as the pensions dashboards unlikely to be enough to ensure appropriate investment strategies and value for money.

Instead, the group recommended that the government and the Financial Conduct Authority continue to look at wider initiatives and regulation to help encourage value for money, particularly for deferred DC pensions.

IFS research economist and author of the report, Kate Ogden, commented: “It is vital that people get the most out of the retirement savings they have done over their working lives.

"This won’t happen automatically. Older personal pensions risk becoming poor value for money.

“The fees charged are often higher than those on pensions taken out more recently. In addition, how they are invested can become less appropriate as individual circumstances change.

"Many would benefit from taking active decisions over their past pensions, and this needs to be made easier to do. But greater individual engagement will never completely fix this issue, and policymakers need to consider wider initiatives to encourage value for money in older pensions.”

Profile Pensions CEO, Jordan Mayo, added: “This important research by the Institute of Fiscal Studies, using data from Profile Pensions, shows the importance of making pension and investment advice more accessible and affordable.

"Our technology is making this happen; now everyone can quickly and easily get whole-of-market investment advice online, discuss it with an adviser if they want to, with no upfront fees and low ongoing costs.”

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