All costs extracted by default funds and schemes should be publicly disclosed via a central registry to promote transparency, the Pensions Institute at Cass Business School has urged.
Last week the Financial Times reported the plan to cap UK workplace pension charges would be postponed by at least a year, a blow to those groups pushing for consumer protection on pension fees.
Key points
Conflicts of interest: The research highlighted concerns around vertical integration, where a provider is also a scheme’s asset manager.
“That can work effectively, however, we just were concerned about the principal of independence and how that works,” said Harrison.
She also addressed the regulatory grey area of consultancies that offer independent advice to employers but also have their own products.
“There is a conflict of interest there,” she said.
Contract law: DC contract law should be changed to facilitate the mass migration of member assets from old high-charge schemes to new low-charge schemes, the institute recommended.
“The market should be much more facilitating of having people have their funds moved to the most cost-effective place,” said Chris Daykin, trustee director at NOW Pensions.
Regulation: The research called for a single regulatory regime for contract and trust-based schemes as well as greater consistency and an end to arbitrary deviations such as that of mastertrusts.
“I’d go a step further,” said Philp. “I think an OfPen – a proper market oversight body – that’s continually looking at these issues, it could form part of a single regulator or it could be separate.
While information on charges such as the annual member charge, the total expense ratio and ongoing charges are available, it is often incomplete, Cass visiting professor Debbie Harrison told delegates last week when presenting the findings of the institute’s latest research into getting value for pension schemes.
“Sometimes the AMC is no different from the TER, the TER can be very explicit or it can just list a lot of items that are not clear, such as marketing – marketing to whom, for what, is a question we may ask there – and my favourite, which is ‘other’,” said Harrison.
She called for full costs, including those incurred by poor market timing of trades, bid-offer spreads and foreign exchange spreads on currency hedging, as well as other hedging costs, to be disclosed to scheme governance boards and regulators.
This would mean component parts of the member charge, as well as the total, could be evaluated in relation to member value for money, Harrison said.
The Pensions Institute set out to examine what a good scheme looks like for the vast majority of members that will be enrolled into default funds, and sets out recommendations for providers, regulators and government to ensure members get value for money from their pension.
Value for money is defined here as income replacement ratio – the ratio of the pension in the first year of retirement to the final salary before retirement, she added.
Each percentage point increase in the member charge leads to a fall in the expected pension at retirement of around 20 per cent, the research revealed.
It also showed there was no link between the cost of membership and higher outcomes.
Charges are crucial to evaluating value for money for members because a lot of the drive towards mastertrust schemes has been around cost to the member, the research said.
Ensuring member charges are fully comparable is key to getting value for the member, something the government’s consultation on a charge cap had not given sufficient attention to, Darren Philp, head of policy at The People’s Pension, told attendees.
“You don’t go into a grocer’s shop and compare apples with pears and sterling with dollars,” Philp said.
The research also found many providers prioritise their services, first to the corporate adviser which sells schemes to employers, second to employers that act as the provider’s unregulated agent and finally to the member, who pays the scheme but has no part in the design of the scheme.
It questioned providers that offer free services to employers and corporate advisers, where the cost is incorporated in member’s annual charge.
