On the go: Members could be suffering poor value for money and seeing their benefits erode by not moving their pensions out of old defined contribution pots, the Institute for Fiscal Studies has warned.
With the number of deferred pension pots steadily increasing in recent years due to auto-enrolment — in 2019, there were 10.3mn deferred pots in occupational schemes — the IFS concluded that savers with these old pensions might be worse off when compared with newer schemes.
Funded by the Economic and Social Research Council, the IFS research used data from Profile Pensions, which provided an anonymised sample of 18,317 potential customers aged mainly between 48 and 60, concluding that the issue with older DC pots stems from the way charges have changed over time.
Over the years, industry competition and government regulation resulted in an average annual charge of 0.48 per cent in 2020 (below the 0.75 per cent charge cap introduced in 2015). The average fee has also fallen to 0.53 per cent.
The IFS argued that many savers with older deferred pots may not have benefited from this reduction in costs, fees and charges, meaning that their pensions represent less value for money than newer pots of comparable size.
The figures “clearly show that there may be significant potential for many individuals with old DC pensions to reduce the charges they pay if they were to move their pension funds to a different provider or plan with fees closer to the current market average”, it explained.
“Even moving to a fund charging 0.75 per cent a year rather than 1 per cent a year, at age 50, could result in someone’s fund being around 4.4 per cent higher at age 67,” it stated.
Using the Profile Pensions data, the report estimated that 79 per cent of those whose pension was started in 2013 were in a scheme with charges of 0.75 per cent or less, a figure that falls to just 23 per cent for those whose pension was started in 2003.
The average fee for deferred pensions taken out in the 1990s before the introduction of stakeholder pensions is above 1.1 per cent, but this falls markedly for pensions taken out in the 2000s to around 0.9 per cent, and to around 0.8 per cent for pensions taken out in the 2010s, the report continued.
There is, then, “considerable concern that older pensions in particular are less competitive, may not reflect changing market conditions, and therefore now represent poor value for money because they charge higher fees than pensions opened more recently”, it stated.
The data also showed little correlation between higher fees and better investment performance in the schemes in question, a link that would have to be in evidence for concerns about value for money to be assuaged.
The IFS report also raised the possibility that portfolio allocations for older schemes were no longer appropriate, with pensions started in the 1980s and 1990s showing no difference in the average equity allocation depending on people’s current age, with those aged 50 and 60 having an average of 70 per cent of their portfolio invested in equities.
Newer pots, by contrast, tend to reduce equity allocation, moving away from risky assets as people get closer to retirement.
Pensions started longer ago appear “less well aligned with individuals’ current willingness and ability to bear risk” than the ones started more recently, “again suggesting that older pensions may no longer be invested in the most appropriate way”, the report explained.
“This potential adverse consequence of low engagement with deferred DC pensions has received very little attention to date,” it continued.
Kate Ogden, research economist at the IFS and one of the authors of the report, said: “It is vital that people get the most out of the retirement saving they have done over their working lives. This won’t happen automatically.
“Older personal pensions risk becoming poor value for money. The fees charged are often higher than those on pensions taken out more recently. In addition, how they are invested can become less appropriate as individual circumstances change.
“Many would benefit from taking active decisions over their past pensions, and this needs to be made easier to do. But greater individual engagement will never completely fix this issue, and policymakers need to consider wider initiatives to encourage value for money in older pensions,” she added.
