Plans risk member backlash over complex DC fees

DC funds are taking on defined benefit (DB) characteristics as their managers develop fee structures, such as performance-related, that they judge more palatable to a price-conscious market.

This poses problems for pension schemes, which along with DC advisers have raised concern about member understanding of the charges. 

In order to avoid the risk of member disengagement, schemes have been told to consider the method of explaining more complex charges, and emphasise their impact on the individual.

Asset manager Schroders has announced an active global equity DC fund with a performance-related fee structure, where higher charges would only incur should the fund managers outperform a certain benchmark.

Beneath the benchmark, the fund would be charged at a base rate of 0.2%. Above it, there would be a 20% fee on any outperformance.

Several schemes contacted by schemeXpert.com were ignorant of this kind of performance-related fee for DC. 

Mark Abbott, pensions manager at Accenture of its DC trust-based scheme of 5,950 members, said he “hadn’t really thought about” this kind of structure.

But communication with members would be vital, he added, to make sure they understand the charges being levied on their savings.

Josephine Smith, communication consultant at Shilling Communication, said schemes have to be “clear and consistent” about these fees.

She said: “With all complex messages, it’s important to consider the personal impact and choose an appropriate method to communicate.

“Members essentially want to know ‘what’s in it for me’, so particularly where there are complexities in the scheme, it’s important to identify why that is important to the member, then target your message appropriately for them.”

A scheme could show what the fee structure would mean in personal terms for a member’s investment, she said, perhaps using a presentation and question and answer session.

It was important to present this new fund offering “in the context of all the funds available”, she added, to avoid the perception of advice.

Scheme concerns

Jane Kola, director at law firm Wragge & Co, said a lot of trustees are highly concerned about costs in DC investment.

“Even though you might have the benefit of low or no cost when the fund is doing averagely okay, I’m not sure how trustees would respond to fees getting a lot higher even if performance was good,” Kola said.

The use of performance fees has been dropping in DB schemes, Kola said, as many were falling “out of love” with the idea.

Kola questioned the degree to which members would understand how the performance-related fee structure worked. Mathematical examples could represent how the changes can benefit the members and exactly when the fee will be kicking in, in a simple format. 

Articulating exactly what doing well – and therefore incurring an ‘active’ fee – meant may present trustee boards and scheme managers with a challenge.

Nigel Aston, business development director at DCisions, reported a growing dissatisfaction with the level of fees being levied in DC, echoed widely in the industry, and more specifically by the regulator.

Concerning default funds typically used by the larger DC plans, Aston said innovation introduced by large fund managers often takes a while to filter down to the schemes themselves.

“We still observe the majority of members being invested in relatively crude, ‘set and forget’ default asset allocations that are predominantly equity-based until a steep de-risking glidepath kicks in towards retirement.

“Our work with Nest highlights the fact that many savers feel uncomfortable with the resultant bumpy ride and a lot of them therefore decide to stop saving altogether,” Ashton added. 

But Stephen Bowles, head of DC at Schroders, argued the performance-related structure was in fact more relevant for DC as "it is the member who pays the fees".

He added: “We don't think communication of this particular innovation will be a problem – members generally pay scant attention to their pension and even less attention to the fees they pay."