LCP finds stark variation in investment pathways charges

Charges levied by pension providers ranged from Scottish Widows’ low of 0.39 per cent to PensionBee’s high of 0.93 per cent with a range in between from other providers, for those going into drawdown known as Pathway 3, LCP found.

Additionally, of the eight providers listed on the Money and Pensions Service comparison site in February 2021, the average charge quoted for a £100,000 pot was 0.64 per cent in one year.

LCP’s findings also showed the investment mix varied greatly between pension providers, with the share in equities ranging from 20 per cent to 53 per cent.

The consultancy said it is concerned that a low allocation to equities would produce poor outcomes over a long retirement; moreover, that even the most heavily equity-based product on offer to these savers might struggle for regular income.

LCP’s research comes after pensions minister Guy Opperman earlier this month urged that defined contribution schemes have room to invest in illiquid asset classes within the charge cap.

At the time, Opperman suggested that rather than remove a cap that schemes are using “barely half of”, they should use this as a hedging opportunity.

Elsewhere, the consultancy made it clear that it believes pension savers risk “poor outcomes” from still having their money invested in low-return cash funds, according to Dan Mikulskis, partner at  LCP.

The 2015 pension freedom changes meant that savers were no longer forced to buy an annuity and could use their pension pot as they wished.

As a result of these freedoms, the Financial Conduct Authority became increasingly concerned about investors “sleepwalking” into having their money invested in very low-return cash funds, where they had no financial adviser.

In January 2019, the FCA proposed new rules on investment pathways, which were aimed at ensuring investment in cash was an active decision.

Investment pathways ensure savers answer a question about plans for their money and they are then offered funds that match the investor’s intentions.

There were some delays on the introduction of these rules, which did not come into force until the beginning of February 2021.

Mikulskis said: “Freedom to choose what to do with your pension pot is a good thing, but too many people are at risk of getting poor outcomes. The new investment pathways are welcome where they have helped to put downward pressure on charges, and could help steer consumers towards the right product.”

However, he added that LCP’s research revealed huge variations between different providers, in terms of both what they will charge and in the product they will offer to the same individual.

“Savers need to look under the bonnet to see how their money will be invested before they choose where to save, and they need to avoid the risk of investing too cautiously given that retirement can easily last for several decades,” Mikulskis said.