PPI calls for industry to judge charges holistically

The PPI’s report, ‘Value for money in DC workplace pensions’, examined the definition of value for money and the factors that influence it through both accumulation and decumulation of a pension pot.

One of the findings of the report was that charge levels should be looked at “together with levels of return” when judging value for money.

“Higher charges can be justified by higher returns, resulting in better outcomes for members,” the report said.

“However, some studies have shown that neither higher nor lower charges automatically lead to better outcomes. They suggest that although some funds with active asset allocations perform better than passive funds, as a sector overall, higher charges are not necessarily a predictor of higher performance.”

Costs and benefits

Melissa Echalier, senior policy researcher at the PPI, said it was unusual to look at costs in isolation: “In any other area you wouldn’t look at the cost without looking at benefit.”

Nathan Long, senior pensions analyst at investment platform provider Hargreaves Lansdown, said there was no link between cost and benefit.

“You can’t say low cost is good or more expensive is good, there’s no correlation,” he said. “If people are paying more, they need to be paying for quality.”

However, the report said concerns remained about the level of charges faced by members of schemes not used for auto-enrolment, as they were not forced to comply with the 75 basis point charge cap.

“There remain concerns around older schemes with schemes set up before 2001 having an average annual charge which is 26 per cent… higher on average than those set up on or after 2001.”

Get out what you put in

Another area of focus for the report was contribution levels and the effect they can have on pot size.

“An increase in contributions from 8 per cent to 9 per cent or under automatic escalation up to 12 per cent could mean a 12 per cent or 44 per cent increase to pension pot size for a 22-year-old median earner,” the report said.

Long said: “It’s all well and good looking at cost, but ultimately the more you pay in, the more you’ll have in retirement.”

He said for those running schemes, “probably what their main focus should be is looking at how people are engaging with their pension scheme. How many people log in online on a monthly or six-monthly basis?”

Boosting engagement

The report includes a case study on the Scottish Power Pension Scheme, which reported a tenth of its membership increased their contributions just three months after the introduction of a communication tool.

Echalier said this kind of engagement was crucial for members to understand their needs.

“It’s a difficult subject because there are all sorts of complexities,” she said. “Members often won’t know until they reach their decumulation whether they’ve had value.”

However, she added she had spoken to schemes that were considering an auto-escalation of contributions for their membership.

Contributions are crucial

Rona Train, partner at investment consultancy Hymans Robertson, said the importance of contributions was well acknowledged among schemes.

She said: “That shouldn’t come as a surprise to anyone. Contributions are clearly going to have the biggest impact.”

However, she added members should be aware of the specific outcome they are likely to want in retirement and plan accordingly.

For example, a low-paid person will find the state pension replaces a significant portion of their salary when they retire, so they may not need high contributions to achieve a high replacement rate.

“It’s all about engaging people in what their income should be,” she said.