Conveniently for me today, and importantly for UK pensions tomorrow, the PPI yesterday published a study of the impact on member outcomes of different non-capped charging structures.
Launching today at an event expertly chaired by @JosephineCumbo What is the impact on member outcomes of different non-capped charging structures? This report is kindly sponsored by @bandce providers of @PeoplesPension https://t.co/lyxmKmgfUV pic.twitter.com/qLmLxMDeG5
— Pensions Policy Institute (PPI) (@PPI_Research) November 24, 2021
As I am speaking on a panel on the question “should the Government increase the charge cap to accommodate investments in illiquid assets?”, I am particularly grateful this report has such relevant conclusions.
Scheme selection and fund choice by employers choosing a scheme for their employees is
not primarily driven by charges;
• Members are not generally engaged with charges and transfers are generally not motivated by charges;
• Outside of the scope of the charge cap the level of fees has been driven down in recent
years, however a charging gap remains between non-capped and capped arrangements;
• Most default investment strategies charge below the cap, eroding a typical pot at
retirement by 14% – a quarter less than the impact of charges at the cap;
• Members of non-default investment strategies and Self Invested Personal Pensions (SIPPs) may incur higher charges, and will need to realise additional benefits, such as a wider range of assets to invest in, to offset higher charges;
• Providers of schemes designed for pot consolidation are advantaged by not being subjectto the cap, and can therefore charge more than automatic enrolment schemes. However, members of these schemes may be disadvantaged through incurring higher charges unless they see other benefits, such as higher returns;
• A combination of the Government measure that pots worth less than £100 cannot incur
flat fees from April 2022 and an increase in consolidation schemes could disadvantage
members who remain saving within automatic enrolment providers by reducing their
value for money.
So what about the charge cap going forward?
When I was involved in the design of the Eagle Star Stakeholder Plan around the turn of the millennium, our original intention was to offer a property fund within the range of investable options . But stakeholders lost the property option when Threadneedle told us how much they were charging in management fees which were impacting the unit price not the headline AMC.
In the end , we chose to take not just the property fund, but all blended fund that included the property fund, off the stakeholder platform. This is the Treasury’s thinking in forcing the DWP’s hand in slackening the charge cap.
You can’t have funds on your plan which are potentially toxic, even within an LTAF, and risk your product becoming non-compliant. The charge cap slackening is not something that anyone expects to bite, but we didn’t expect the Equitable Life guarantees to bite.
The PPI report tells us that the charge cap is not a matter of concern for members who neither consider the charge cap or charges as their main reason for being in a pension scheme. Their reason for being in a pension scheme is to have security in retirement and they leave it to scheme managers to work out what’s best for their outcomes.
The charge cap will become a noose around the neck of scheme charges but it is not expected to hang any schemes soon. It’s presence is a deterrent and its application as likely as the deployment of a nuclear missile, though hopefully without such toxic impact!
Is the debate worth having, I will tell you more this afternoon, but I suspect that what we are going to discuss is less about member protection and more about fund governance. By telling trustees and other fiduciaries, that the noose is being slackened, they are asking them to consider what risk can be included in workplace DC defaults and those risks now include “illiquidity”, “charge spikes” and most dangerously “investment in things we know nothing about”.
Seen positively, slackening the noose is a challenge to trustees and insured providers to raise their game.