personal finance

Low fees not always good value for pension savers, says report


Low charges are no guarantee of getting good value when saving for a pension, according to new analysis which bucks the view that investors should be solely focused on fees.

A study by the Pensions Policy Institute, an independent research group, underlined the importance of considering the size of payments into a pension and its investment strategy when judging pension outcomes, not just the charges paid.

Since 2012, more than 10m people have been enrolled into workplace pensions and are currently protected by a 0.75 per cent cap on the charges paid to the provider.

But while savers and pension scheme trustees often focus on fees, the PPI analysis found that paying an extra 2 per cent of salary into a workplace pension, above the minimum mandated contributions, could boost retirement income by 25 per cent.

“Charging levels and structures have an important role to play in determining member outcomes,” said the PPI in its report.

“However, to secure improved outcomes, charges need to be considered alongside other factors such as contribution levels, investment strategies, member communications and experience, the strength of governance oversight and the impact of having multiple pots.”

For its analysis, the PPI examined different charging structures available to employers choosing a workplace pension scheme for staff.

These included providers only levying an annual management charge (AMC), applied as a percentage of funds under management, as well as those levying a combination of AMCs alongside monthly contribution or investment fees.

“There is a wide range of charging structures in auto enrolment default schemes that fall within the charge cap of 0.75 per cent or equivalent,” said the report.

Modelling by the PPI found that a 20-year-old male who started paying 8 per cent of his salary into a pension until age 68, would have a retirement fund of £144,000 if he used a single AMC charging structure, or £153,000 if he used a tiered fee structure, where costs decreased as the pot size grew.

Combination charges (where an AMC is combined with either a flat fee or a contribution fee) generally provide better outcomes over time than an AMC-only approach, the PPI analysis found.

“This is particularly true when an individual has deferred or multiple pots, where the same AMC continues to be levied even when contributions have ceased,” said the report. “However, fixed flat fees can erode deferred savings over time.”

The analysis, sponsored by Smart Pension, a provider, comes as companies have come under scrutiny from MPs over their pension charging structures.

NOW: Pensions, a workplace pension provider with millions of savers, has faced questions from a parliamentary select committee over concerns that its charging structure, a 0.3 per cent investment fee with a monthly administration charge of £1.50, was wiping out smaller pension pots.

Patrick Luthi, chief executive of NOW: Pensions, said: “PPI’s research is welcome — it shines a helpful light on how different charging structures will benefit different career patterns.

“At NOW: Pensions we are clear that our charges are fair to all contributors and offer excellent value for money to long-term savers.”

The PPI analysis also found that providers that do not charge employers for services such as automatic enrolment assessment and general administration, might not be as beneficial to members if they are having to subsidise those services.

“A really low member charge, providing better value for a member, might not deliver as good value for employers if they have considerable other charges,” found the report.



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