The People’s Pension introduces ‘criticised’ annual charge

The People’s Pension has justified such a change – different from its original plan announced in February 2019 – as driven by the need to stop cross-subsidising between active savers and deferred members, and also due to the uncertainty caused by the Covid-19 pandemic.

The master trust announced on Thursday a new combined annual management charge that will consist of three components: an annual fee of £2.50, deducted during each scheme year, a management charge of 0.5 per cent, and a rebate on the latter of between 0.1 per cent on savings of more than £6,000 and 0.3 per cent on savings above £50,000.

The original structure consisted of different bands, which would see the fees reduced as pot sizes grow, and did not include an annual fixed charge.

Obviously, this is a time of great difficulty for many companies, including master trusts – especially as revenues are derived from a percentage of AUM, which will have significantly decreased over the past few weeks

Laura Myers, LCP

Now Pensions, which operates a similar model – a £1.50 admin fee a month per member on top of a 0.3 per cent annual management charge – was criticised in February 2019 by Labour MP Steve McCabe, member of the Work and Pensions select committee, who alleged the provider’s structure had “eaten away the entire pot of some of their customers”.

At the time, the provider argued that separating the fees is more transparent, as “it is clear to members how much they are paying for investment management, and how much for scheme administration and communication”.

Gregg McClymont, director of policy at The People’s Pension, told Pensions Expert that the £2.50 annual fee is far less than the one charged by Now Pensions.

“There is a big difference in magnitude,” he noted, adding that the “combined charges have been part of the model of auto-enrolment for a while”.

Indeed, Smart Pension has a similar model for some employers – with an admin fee up to £1.25 per month in addition to a fund-based annual management charge of 0.25 per cent* – but the flat fee cuts out when pots drop below £500.

Stopping cross-subsidies between members

Mr McClymont argued that the master trust had “been very keen since the beginning of auto-enrolment to try to do everything possible to help with the challenge of the proliferation of small deferred pots”.

For now, the provider took the view that the cross-subsidy from active savers to the deferred pots needs to be reduced.

“We are the biggest AE scheme outside of Nest, we have 5m members and more than 3m of those are deferred, and the vast majority has very small pots,” he said.

“We took the view that the focus should be on those who are actively saving, who also have small pots – our average size is £1,600,” he noted.

Later in the year the rebate on its management charge will start at £3,000 from the current £6,000, which will include more than 500,000 members in the rebate system, Mr McClymont said.

The master trust’s original plan was to have the rebate starting on £3,000 of savings, but due to the government’s consultation on the general levy increase, the provider had to raise the bar to “guard against the possibility of further rises in regulatory fees”, Mr McClymont added.

Now that the government has decided to revoke the 10 per cent levy increase as a result of the coronavirus pandemic, The People’s Pension will revert back to the original bracket for the rebates.

Laura Myers, partner and head of defined contribution at LCP, argued that an annual fixed fee and the halving of the starting rate for the rebate “is detrimental to small/forgotten pots”.

“In my view, this is a clear message from The People’s Pension that they don’t want that type of saver; they want active members who are saving into their master trust, and ultimately want to see consolidation of pots.”

Mr McClymont argued that there will need to be a solution involving the government, sooner rather than later.

“It’s impossible to encourage individuals to take responsibility and bring them together – we know how challenging everyday life is, trying to trace down 15 pension pots after a lifetime of working, or even before; it’s tough. A systematic solution is necessary.”

Provider impacted by coronavirus pandemic

One of the reasons given by The People’s Pension for the new combined structure is the onset of Covid-19, since the extraordinary volatility in markets had a bigger impact with an AMC model consisting of a single charge.

This way, the master trust has a more robust structure to be able to cope with the financial uncertainty of the pandemic, Mr McClymont explained.

The provider has furloughed 140 staff members due to the current crisis, in an attempt to minimise its operating model, in line with the government advice, he said.

“We need to ensure we can deliver the core services that customers expect in these very unusual times, and protect our staff at the same time and deliver our duty of care.

“Because all of our administration is done in-house, we have a lot of staff on site, so it is an attempt that core services are delivered with the minimum amount of people, with additional staff being furloughed because business as usual just doesn’t exist,” Mr McClymont said.

The People’s Pension is currently experiencing half of the normal volume of inquiries from customers, he noted. As the situation progresses and numbers come back to normal, the provider will be bringing its staff back, he added.

Ms Myers said: “Obviously, this is a time of great difficulty for many companies, including master trusts – especially as revenues are derived from a percentage of assets under management, which will have significantly decreased over the past few weeks.”

She added that after the announcement of the furloughed staff, “it’s not a surprise that they’re looking at how to stabilise their revenue stream so that they remain in business for their many savers”.

*This article has been updated to reflect an inaccuracy in Smart Pension charging structure