The jambalaya of combination charges must go!


Pension Bee has found a new phrase for us. “The jambalaya of combination charges”   was concocted in the kitchens of master trusts who found they could not finance the heavy lifting from an annual management charge but had to have recourse to monthly policy fees, clips on contributions and some very un-transparent disclosures on what these charges were buying by way of fund management.

The simple approach adopted by Legal & General when AE started was to charge an annual management charge which comprised a percentage of your fund to pay Legal & general for managing your policy and a separate amount which went to the fund manager for managing your investments. Put together , you knew what you were paying and if you wanted to compare what you were paying with another company, then you could ask for the same split.

But it wasn’t that easy. Famously when asked at a transparency session, what Nest was paying for its fund management, its CIO admitted that he was prevented from doing so by a non-disclosure agreement. We have no idea how much of the 0.5% pa – we pay People’s Pension goes to State Street and how much is retained by the master trust to look after us.

In writing this, I  have to point out that the 0.5% AMC on which People’s Pension was founded is no longer a 0.5% and has been corrupted by tiered charges depending on asset size with fixed fees being introduced in 2019. So complex was the new variant that when I asked People’s Chair of Trustees to explain it, he admitted he’d forgotten its components.

People had to retreat from their original position because they were losing money on the mono-charge. Nest had to move from the mono-charge to find a way to repay the Government loan it took out to fund its activities while NOW pensions simply told us that if we wanted a good service from them, we’d have to pay flat fees. Ironically, those who signed up to NOW’s proposition paid the fees but got poor service (things are improving).

Meanwhile the insurers who stayed in the game (Aviva, Aegon, Royal London, L&G and Standard Life)  , had been marketing a mono-charge product since the introduction of stakeholder pensions and had learned to underwrite the business they took on to make money out of the annual management charge- capped though it was.

So the bifurcation of the market meant that if you were able to get a workplace pension from an insurer (and many micro companies couldn’t), then you had a clean charging structure and if you went to a master trust you had a dirty one.

Now Guy Opperman and the DWP want to get rid of all the wrinkles (combination charges) in the master trusts and return to the original idea for stakeholder pensions with a capped AMC being the only thing the member/saver/consumer pays, Opperman is clear why he thinks this could be a good idea

The proposals in this consultation document are rightly focussed on my ambitions to
benefit members of pension schemes used for automatic enrolment and ensure both
their pension pots are protected, and that in the future, they have greater clarity of
the charges they pay, can feel more engaged with their pension, and make informed
choices going forward.

This is not a million miles away from what Pension Bee are saying

“No reasonable person is able to understand or compare the jambalaya of combination charges across AE schemes. The only way to offer comparability, transparency, and real engagement with pensions is standardisation of a single percentage annual management charge (AMC) across all types of pots.

“At PensionBee we’ve long called for the abolition of combination charges, charges that at best confuse savers, at worst erase their savings to zero. A single fee charging structure gives customers clarity, confidence and control in their understanding of how our service, and indeed, all pensions should work.”

To me , it’s more than just the AMC that needs standardizing. We need to know how the AMC is being spent (the split between the policy fee and the investment charge) so we can understand about the value we are getting for our money. And we need some standard metrics on what all this money has delivered by way of growth in the money we’ve given these pension providers.

Pension Bee have followed L&G down the transparent path to full disclosure of where money goes so I can compare how much I’m paying them for service and how much for investment. They are also looking at the outcomes of the investments as they impact on member outcomes and in doing this they are winning the admiration and respect not just of the regulators but of the wider public.

Opperman points out that moving to a single AMC will not be without problems, not least for its pet master trust – Nest. It will be hard for NOW and its new owners Cardano and hard for People’s Pension and the insurer behind them. It will be hard Cushon and the other smaller trusts which are heavily dependent on combination charging to pay the bills. It should be noted that one of the biggest bills is to the regulator for the member levy.

In order to rid ourselves of combination charges and get to standard charging, we will see some AMCs go up, But that can be acceptable if the member outcomes aren’t impacted. However, while overall the impact on the scheme can be balanced to remain neutral, the mono-charge will mean that big pots subsidize small pots and for schemes where there is no underwriting, that will mean that some schemes will become less attractive to those with big pots.

The way out of the bind that firms like NOW have got themselves into , is by becoming more efficient in looking after small pots and finding ways to get money coming to them by way of larger contributions , pot consolidation and in retirement services such as CDC.

It is a big ask for the Government to intervene in the financing of these big schemes and there should be a quid per quo. Most of the schemes that operate combination charges , operate net pay contribution collection which means many of their savers are overpaying their contributions by not getting the benefit of savings incentives.

The quid per quo for sorting combination charges, should be that Government adopts the P800 solution for net pay.


About henry tapper

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