Yesterday I published the news that People’s Pension has dropped its prices for those with larger balances which they estimate will lead to a 10% drop in overall fee income.

That is good news, especially if you are in a position to take large balances to People’s Pension (transfers) and it shows why with sound financial management , a good product and excellent marketing, a not-for profit can generate and distribute special value.

What I didn’t read yesterday, but have this morning is the small print of the press release , which contains news that has more general significance for savers.

What these new charges actually mean.

Charges on pension schemes matter, as Norma Cohen points out.

Fees are the biggest single factor affecting the size of your pension pot at retirement. Forget whiz-kid investment managers. Lower Fees=Bigger Retirement Savings. Will other providers follow People’s Pensions? https://t.co/6SIrPODtS4

— Norma Cohen (@NormaCohen3) February 21, 2019

Here again is the new charging structure

In the small print of the press release are a series of tables preceded by the following statement

I know enough about these things to understand these as prudent assumptions.

Now come four tables that put £sd numbers to the impact of charges on “People’s” funds.

The first one shows that low earners won’t benefit from the new charging structure till they have been enrolled with People’s for around 14 years. If they use People’s for a lifetime , they will be paying a little less to tPP over time. The blunt message is that People’s are not cross subsidising small pots as they use to. Harsh but honest and compared to the impact of fixed deductions (as at NOW) the low earners are still getting a low cost pension.

For someone on just under average earnings, the new charging structure makes a difference in under five years. Over a lifetime, the cost of tPP falls by a half – even without transfers in. Accepting that most people cannot use a single workplace pension we can take these lifetime numbers to assume that tPP becomes the aggregation pension of choice – taking in pots from other workplace savings and perhaps some private savings as well.

When we look at saving for someone on just over average income, the benefits are both more immediate and larger. Here the cross subsidies implicit in the single charge of 0.5% are more fully revealed.

The higher rate tax payer will of course be benefiting from a higher rate of contribution subsidy from income tax , but will be seeing the greatest benefits from the new charging structure. The improvements in projected outcomes for the larger contributors are strikingly larger than for low-earners. The message is the more the merrier.

.For the average earner the new charge structure could enable them to save an extra £54,535.60 compared to paying a flat rate AMC of 0.75%. Assuming the average earner requires 2/3rds of their salary as a retirement income and receives a full state pension of 8,767.20 a year (2019/20 prices), the £54,535.60 equals roughly five years additional retirement income

And the bit that’s most important of all

I have it from People’s Pension that it intends on all member communications involving charges to be explicit in pounds, shilling and pence terms about Ruston Smith and Quietroom was neutered by certain parties who claimed that telling people what they were paying for saving would put them off saving.

Since then, the FCA has made it clear that the direction of travel (for drawdown policies) , will be full pounds shilling and pence cost disclosure.

People’s decision to adopt this form of disclosure , is very welcome news indeed. Ironically , I have this only orally and we await the confirmation in writing. This news is worth a separate press release!

I have seen similar innovation on recent Scottish Widows prototypes and suspect that those who are trying to hold the line on this kind of cost disclosure , will soon be forced to admit defeat. People deserve to know a what they are paying. No shopping bill comes without a receipt.

What People’s are doing

People’s are actually returning to a charging structure that was prevalent before the mono-charge. Legal & General operated a tiered charging structure up until the introduction of auto-enrolment. Some may lament the end of a cross subsidy to small pots but not I. Small pots end up being encouraged by a mono-charge.

While I do not favour the brutality of fixed annual fees which tend to eat small pots up, I do think that people should be rewarded for higher saving and for aggregation.

Many SIPPs, including Pension Bee, operate tiered charging structures for sound commercial reasons.

People’s Pension is being commercial in adopting this practice , but it is doing so without making matters worse for any of its savers. Even those with small pots (the majority of People’s Pensions members) will pay no more than they do today. This is what gives these changes their moral authority, there is an integrity about these changes.

As I mentioned yesterday, People’s are using their muscle as a not for profit. Because they have no shareholders  – and unlike NEST, no debt – they can put member’s first in the queue.

NOW is now part of Cardano, the insurers have generally demutualised and that leaves one or two smaller master trusts – notably BlueSky (Evolve) in a position to follow People’s down this route. Frankly the workplace pension saving market looks set to tilt in People’s favour.

One fly in the ointment

There is no doubt that People’s investment proposition and at retirement options lag one or two of their rivals. NEST’s investment operation puts People’s to shame, Cardano has the opportunity to deliver high quality fiduciary management for NOW, People’s really needs to show some improvement on the investment front.

People’s also needs to think hard about its at retirement options. It has hardly embraced the innovation of CDC , nor is it showing much sign of wanting to be a drawdown provider. While it has relatively few people wanting their money back today, that won’t last long. With more than 4m pots , it needs to really beef up its at retirement proposition.

If not, it will find that for all its cost reductions, it will find it hard to compete against the SIPPs or against innovators like Smart , for the pots of mature savers.

People’s promise of lower charges, must not be at the expense of product development. While I applaud the lower charges and the promised disclosure regime, I worry that the product may not deliver quite the value even the reduced amount of money deserves.