The average annual management charge for defined contribution (DC) pension schemes has fallen to 28 basis points, even as policymakers are pushing to refocus the industry on overall value for money.
WTW’s latest annual DC Pensions and Savings Survey has found that the average charge has fallen from 38bps in 2017 to 28bps this year, with almost two thirds of schemes now charging less than 30bps a year.
The survey also found evidence of providers competing on cost. Employers that had been with the same DC provider for 10 years or more were more likely to pay annual charges of 30bps or more, the study found, while those that have changed provider more recently were more likely to pay less.
“Value is being driven from getting a better deal across the range of services, rather than just driving down costs.”
Stuart Arnold, WTW
Helen Holman, head of DC consulting at WTW, said: “The question is whether we have now reached the stage where the focus on driving costs down has gone too far and whether there is room to increase value-for-money by accessing alternative investment strategies that can provide growth, diversification and value, despite higher costs.
“Whether illiquid assets, such as private equity or infrastructure, hold the potential to enhance risk-adjusted returns is a key debate in the pension industry, with the UK government seeking to encourage greater investment in illiquid assets via the Mansion House Compact.”
Despite the cost findings, WTW’s researchers also found evidence that other factors were being considered by employers when selecting and managing their DC providers. The survey asked employers to rate their providers by different value metrics, and found that almost half (47%) of those that have run a selection exercise in the past two years reported that their provider was “highly effective” across a range of considerations, including communications, digital tools, investment options, and at-retirement services.
Stuart Arnold, a director at WTW and co-author of the survey, said: “Value is being driven from getting a better deal across the range of services, rather than just driving down costs.”
DC providers consider ‘going for growth’
Industry initiatives such as the Mansion House Compact and Mansion House Accord have led to many large DC providers pledging to allocate significantly to asset classes such as private equity and infrastructure, moves actively encouraged by policymakers.
The government is also legislating for DC consolidation to create larger, more sophisticated pension schemes capable of allocating significantly to unlisted assets.
In July, the Lord Mayor of London, Alastair King, led the launch of the Employer Pension Pledge, which asks firms to prioritise net returns when selecting or reviewing DC pension providers. It also encourages employers to demand greater transparency from schemes on how they invest, including in private markets.
WTW’s survey asked pension schemes whether they would be willing to increase their charges to facilitate investment in illiquid assets, which are typically more expensive than listed market strategies.
Of those with at least £400m in total assets under management, 39% said they would consider upping their charges, but just 12% of those with less than £100m said they would do so.
