The charges applying to an individual’s pension fund can have a significant impact on the value of their pension pot over time. While the percentage taken in charges might appear small, the cumulative impact can be significant (Cm 8737, October 2013, para 1.9).
A difficulty in addressing this is that there has been “no standard definition of the component services and activities included within the headline charge quoted for each DC scheme.” (Ibid, para 2.6)
The introduction of auto-enrolment from 2012 has made it particularly important that workplace pension schemes deliver value for money. As DWP and the FCA explained in 2015, there was much to be done:
- The introduction of automatic enrolment means that it is important to ensure that workplace pension schemes deliver the best possible value for money. However, the 2013 defined contribution workplace pension market study by the Office of Fair Trading (OFT) highlighted problems with the existing market, including poor outcomes for the buyer and the potential for conflicts of interest. The study covered both occupational and workplace personal pension schemes, since employers can choose either type of scheme for their employees.
- In its report, the OFT found that the market for buyers was ‘one of the weakest that the OFT has analysed in recent years’. Employers make most of the key decisions but may lack the capability and/or the incentive to ensure that members of their schemes receive value for money in the long term. Employees often take little interest in their pension savings and, with automatic enrolment, they make no active choice to join, are enrolled at a default contribution level, and do not need to choose the fund into which they save. The OFT concluded that neither employers nor employees can be expected to drive value effective value for money between firms. However, well-governed schemes are more likely to provide value for money by reviewing the quality of scheme administration, investment management services, costs and charges on an ongoing basis.(DP 15/2, March 2015).
Changes intended to provide “greater protection for people who have been defaulted into private pension saving” are being implemented in stages, starting with two reforms introduced in April 2015:
- A charge cap on the default arrangements of qualifying DC workplace pension schemes. The annual cap is set at 0.75 per cent of funds under management or an equivalent combination charge. It applies to all ongoing charges, and therefore excludes transaction costs (SI 2015/879)
- A ban on consultancy charges in all qualifying DC contract-based schemes. This followed 2013 legislation which banned new consultancy charge agreements from being set up.
Further changes were introduced in April 2016, to prevent providers from levying charges that would be particularly inappropriate to those who had been auto-enrolled:
- In the past, some providers gave active member discounts (AMDs) to members who people who were paying into a scheme, at the expense of those who had stopped doing so. AMDs were banned in qualifying DC workplace pension schemes from April 2016 (SI 2015/879);
- Commission and consultancy charges were banned in qualifying DC trust-based schemes (2016/304).
DWP’s 2016 Pension Charges Survey found that:
- The charge cap had lowered charges in qualifying schemes to the level of the cap or below: as many as 98 per cent of members of qualifying contract-based schemes and 99 per cent of members of qualifying trust-based schemes now paid a maximum of 0.75 per cent.
- Among qualifying scheme members, the members of the smallest schemes, which previously charged higher than the cap, benefitted the most. For example, ongoing charges for qualifying contract-based schemes with 12 or fewer members fell by 0.2 percentage points on average.
- Non-qualifying schemes, whose charges are not subject to the cap and were already typically higher than it, had not generally brought down their charges in response. In non-qualifying contract-based schemes just 21 per cent of members paid charges within the cap; and in non-qualifying trust-based schemes 50 per cent of members paid charges within the cap – both showing little change since 2015.
- Charges for unbundled trust-based schemes, measured for the first time in the 2016 survey, were typically comparable to their equivalent bundled trust-based schemes, although a relatively small number of closed, non-qualifying schemes charged markedly higher than the average.
- ‘Legacy’ charges that were banned under the charges measures (i.e. Active Member Discounts (AMDs), consultancy charges and member-borne commission) had been eliminated from qualifying schemes, and remained extremely rare even among non- qualifying schemes.
- There was virtually no improvement in providers’ abilities to report on transaction costs compared to 2015, with many providers, unbundled scheme trustees and their fund managers awaiting further guidance from the Government.
In November 2017, the Government introduced new rules to improve the transparency and disclosure of pension scheme charges. Providers of contract-based schemes are required to have an Independent Governance Committee (IGC), responsible for monitoring the value delivered by these schemes and producing an annual report detailing the costs and charges incurred in managing the pension scheme. Trustees of trust-based schemes have a similar requirement to consider and report on costs and charges, via an annual Chair’s Statement.
In November 2017, the Government said that the charge cap was working “broadly as intended” and that it had decided not to change its level or scope at this stage (HCWS 249, 16 November 2017).
The Pensions Act 2014 provided for a requirement to disclose transaction costs (i.e. the costs that a scheme incurs as a result of buying, selling, lending and borrowing investments). In September 2017, the FCA published rules on how such costs should be disclosed to governance bodies (PS 17/20). The Government is now consulting on how costs and charges should best be disclosed to members and others.
The Pension Schemes Act 2017 (s41) provided for regulations to be able to override certain contractual terms in occupational pension schemes, to enable the implementation of a cap on early exit charges and a ban member-borne commission charges.