“Making Pension Charges Clearer” – good on the NAPF

English: "Revenue reform" train stop...

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The NAPF, as I’ve mentioned a few times on this blog, are a rather better trade body than you’d expect . Revitalised by Joanne Seagers and Dan Torjussen-Proctor they appear a more progressive member centric organisation than in years gone by.

Ambitiously, they have decided to take on the vested interests of the fund management industry and issue a consultation on “transparency of fund charges”.

Here are my thoughts , you may have your own.

I welcome this initiative from the NAPF and in particular the idea of an industry Summit on  fund charges. The Pension Regulator has determined “Value for Money” as one of the 6 key driver of DC outcomes, the question is not just whether there is value arising from fund management activities but what “money” is being paid by the DC account holder for the fund management.

As the NAPF’s paper of November 2011 makes clear, a member of a DC plan is unlikely to get a clear view of what he or she is paying, how the payments affect the outcome of their pension saving and whether this payment represents good value.

The NAPF have wisely decided not to discuss the “value” question and to concentrate on ways of “making pension charges clearer”.

I’m going to be polite and make the following observations and close with three recommendations that I reckon would make for the basis of an “Industry Code of Practice”.


 1.       DC outcomes are subject to the same influences whether arising from contract based or trust based pension saving vehicles. There is no    sense in having differing disclosures for each.

2.       Fund management charges form a part of the total charges levied on a member’s account but are rarely separately disclosed. There is only so much information a member can take in and charges should normally be expressed in total. Where a member wishes to find out in more detail how the charges split , the information should be accessible for instance through a hyperlink or in paper form through an appendix.

 3.       Members of Dc savings plans are not really concerned  about how the charges on the fund are sliced and diced, they are concerned as the paper confirms, at the total impact of charges, especially when they can see it properly explained. However , a statement of the impact of the charges is meaningless unless it can be benchmarked. You can dmeonstrate the impact of charges to those purchasing funds by using comparative charging structures to demonstrate their impact. 

For instance, in the table below we show how the reduction in yield decreasing from 1.0% pa to 0.55%, has the same  impact to a 30 year old (retiring at 65) as an increase of 2%pa of salary to the employer’s contribution rate.





  SMPI (1% expenses) SMPI (0.55% expenses) Current
Under 30 16.0% 6.5% 9.5% 14.0% 6.5% 7.5% 16.5% 5.3% 11.2%
30 – 39 21.5% 6.5% 15.0% 19.0% 6.5% 12.5% 16.5% 5.3% 11.2%
40 – 49 29.0% 6.5% 22.5% 25.5% 6.5% 19.0% 16.5% 5.3% 11.2%
Over 50 39.0% 6.5% 32.5% 34.5% 6.5% 28.0% 16.5% 5.3% 11.2%



My recommendations to the NAPF fall out of these three observations

 From observation one, our recommendation is that disclosures should be consistent across trust based and contract based plans. They should be expressed as the total charge including the fund expenses impacting the unit price and not expressed in the AMC.

From observation two, my recommendation is that the primary information should be simple with the breakdown of where the charges go being readily available for those who wish more information.

From observation three, my recommendation is that the charges be expressed in a relevant way. It may be relevant to express them in relation to the reduction in pension purchasing power they create, or in the reduction in the value of the employer contribution or it may be better to show how a lower charge improves matters. Simply stating charges as an AMC or TER or other such irrelevant measure is not good enough.

I have a fourth recommendation, arising from our thinking on the charging of “fund expenses both at the fund management level and at the policy level. Our recommendation is that fund expenses be quoted as part of the annual management charge and not in addition to it. Details on this obscure but important issue are found in the addendum to this document.








Fund managers have the right to pass on all manner of costs to their customers; these costs are levied as “fund expenses” and are not normally included in the quoted annual management charge. They are taken directly from the fund and their impact is felt in a reduction in the unit price which determines the eventual pay out.

These charges can be found in the published accounts of a fund and can make interesting reading. Typically the charges include the fund manager’s standard fee (which can be supplemented by performance related fees) but also auditor fees, registration fees and then the transaction costs which can include the costs of derivatives, commissions and other transactional expenses. Then of course there are further deductions relating to trading, most notably stamp duty and non-recoverable VAT.  

Taken together, these costs can add up to a substantial proportion of the total revenues generated by the fund. We have no evidence that these expenses are being badly managed and there is an incentive for managers to minimise the costs to accelerate performance. However, the complexity of the charges that can be levied as “fund expenses” gives scope for managers to pass on costs that should be borne by the manager. There is also scope for the practice of paying “soft commissions” where fund managers will use expensive services from third parties which are passed on as fund expenses and in return received subsidised goods and services such as software from the third party.

The complexity that exists within the accounting policies of individual funds is also prevalent in the policies of the insurers who wrap these funds within insurance and reinsurance agreements.

L&G have a clause in their policy (5.12) where they can charge anything they deem reasonable at their discretion (all charges, expenses, taxes, levies, regulatory fees, reinsurance premiums and other outgoings..).

Undoubtedly, many trustees of occupational pension schemes, faced with their bill for the PPF levy would wish for the sake of their scheme’s solvency that they could insert such a clause to offset their scheme liabilities in a similar way.

These costs are on top of the expenses already incurred by the fund manager. We should point out that both at the fund level and at the policy level, L &G and LGIM have an admirable record of not passing on costs that should reasonably be charged to their shareholder

As a general observation, the more active the fund management, the higher the level of the fund expenses and the greater the opportunity for obfuscation, bad practice and even fraud.


The opportunity for bad practice among managers, especially active managers with complex fee structures, makes the auditing of fund expenses problematic. If the quoted annual management charge to be levied by the manager was to include these expenses, as sometime happens, the incentive to keep costs to a minimum would be greatly increased.

So long as the only impact of these expenses is to dilute the return on the fund, the opportunity for poor cost containment or even fraud, will continue to exist.

About henry tapper

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