A Christmas message of hope for your pension

The Pensions ‘industry’ exists to provide vast revenues FOR ITSELF, and any residual money left is then shared out; comment on the Telegraph website.

The Royal society of the Arts recently pointed out that relative to Dutch pensions, we have grossly inefficient retirement savings plans. Their report that you can read here, is one of the most sensible pieces of pension research I have read and should be on every pension manager’s required reading list

Last week I posted this on a pensions website.

What annual management charge should you be paying on your DC Default option?

1.5% pa- the temporary  stakeholder limit

1%- the long-term stakeholder limit

0.5% – a target charge often quoted by consultants for properly sponsored large plans

0.3%- the long-term NEST charging target

or 0.1% pa. The “all-in” charge on the default fund of the Logica GPP?

The 0.1% is not a subsidised charge – it is the total charge levied by Standard Life on a standard passive default lifestyle option.

 In the light of yesterday’s RSA paper – isn’t it time that we looked again at our DC plans?

The AMC of a pensions saving plan is the percentage of the total fund you are building up which is taken in charges. 1.5% pa may not seem a lot but it is fifteen times the amount being taken out of the cheapest pension scheme available.

As the RSA paper points out, the impact of a higher charge is a lower return. An AMC of 1.5% will result in a 1% lower return relative to an AMC of 0.5% (and 1.4% less than 0.1%).

The RSA’s paper point out why this matters;-     

   A 1% lower return will give a 25% lower pension. So someone who expected £100 a week as a pension will get £75 if the return is 1% lower. Putting it the other way around, someone who expected a £75 pension will get £100 if returns are 1% higher — a 33% uplift in their pension.

 Only a few of us are lucky enough to benefit from really low charges. That is because we cannot individually access these rates, we can only do so where an employer has negotiated these charges for us, using their collective buying power.

The question I asked on the website was to the people responsible to negotiating these lower charges and you should be asking the same question if you are in a company sponsored pension plan, operating on a Defined Contribution Basis.

If your scheme has a default fund whose AMC is above 0.5% pa, it is almost certainly up for renegotiation.

The Pensions Industry will not thank you for asking this question. Some schemes may have valid reasons for having high charges but most won’t.

Since there is no obvious pressure on companies to renegotiate charges for their employees , I see no obvious reason why pension charges will fall. Unless that is, voices such as the RSA are heard.

Charges, as the RSA points out, are only a part of the jigsaw and to properly put pensions right, the Pensions Industry is going to have to rearrange the other pieces, by introducing a more collective approach to provision.

If the Pensions Industry is to counter the charge laid against about it on the Telegraph bulletin board, it needs to read, digest and act upon this statement from the RSA report;-

If we take all these features (costs, returns and product design), they make a huge di¤erence to the likely value of the pension paid. One study, by Beth Almeida and William Fornia, illustrates just how large the di¤erence can be. They reckoned that for the same expected pension, an individual DC pension cost 83% more than one which was collectively provided! 

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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