Will tomorrow’s pension decisions focus on cost , value or both?

I’ve now had a chance to properly read the Pension Policy Institute’s ”

What is the impact on member outcomes of different non-capped charging structures?

It’s a splendid piece of work, and it’s the second important contribution to the debate on “value for money” in the space of a week. They are certainly keeping me blogging!

This report

• Sets out the proportion of pension scheme membership subject to capped charges and the scale of uncapped charges in the market;
• Identifies how non-capped arrangements differ from capped arrangements;
• Analyses the at-retirement impact on members; and
• considers how the market may evolve as a result of charge cap development.

but it also sheds light on a number of questions I pick up on , in this blog.

Why do we have a charge cap?

In 2014 the OFT found that  competition alone could not be relied upon to drive value for money

They had concluded the necessity for Government intervention to ensure members could attain value for money, and, in the absence of minimum standards, there was the risk of damage to the pensions industry should the Competition and Markets Authority (CMA) feel the need to launch a market investigation

Rather than risk damage to the industry (and more importantly to the fledgling auto-enrolment project, Steve Webb, the then pensions minister introduced a charge cap. It was introduced reluctantly and remains controversial to this day. I was on a panel at a mid-week conference where there was strong support for the relaxation of the cap and some support for its removal altogether.

A universal cap which is working well?

The PPI finds that though the charge cap is most associated with workplace pensions, its influence is felt in almost all other areas of retirement saving. The reduction in overall costs of DC pensions is down to a number of factors, but the charge cap is held to be the main one.

Although master trusts are the fastest growing area of workplace savings, they only represent  at £52bn just over 10% of money saved through payroll. (£500bn). And workplace pensions are less than half of the DC savings market, it’s estimated that non-workplace pensions account for £600m and these are split between largely unmanaged legacy pensions and highly managed Self Invested Personal Pensions.

The PPI reports that the only area of this DC market where charges regularly exceed the 0.75% charge cap is the SIPP market. As I have written many times, the charges in the SIPP market are typically loaded for the payment of financial advice. In the non-advised world, hardly anyone is unconsciously investing in uncapped funds.

So the pension cap has done its job and continues to hold sway over our savings. Anyone over 55 can transfer away from a policy with exit penalties and be protected by a further cap – a 1% exit penalty charge.  This has made life considerably easier for those wishing to consolidate their pensions and has opened up an important avenue of new business for pension consolidators.

So has the quality of purchasing improved?

The PPI report draws two very interesting conclusions

• Charges are not a motivating factor in transferring funds, more generally members are concerned with choosing a preferred investment approach.
• Transferring to arrangements and schemes outside of the charge cap could have consequences for pot sizes

People tend to choose where to consolidate their pension on perceived quality of service and for their favored investment approach. Where an adviser is employed, the choice will be influenced by the adviser’s recommendations.

The recent research by Ignition House for the DWP noted that when presented with price information on single statements, most savers wanted to know what they got for their money (though keen to know what the money they were paying was).

However, in Government circles we see a much greater emphasis on price comparison. Look at the choices on MaPS Investment Pathways comparison site for instance

The FCA are  concerned with “member detriment” and little swayed by arguments about “value”. A frequently voiced frustration of IGCs is that all the benchmarking of employer schemes will reveal is a price comparison.

The announcement in the Autumn Budget that the Treasury were requiring a review of the charge cap to encourage more innovative investment suggests that there may be some regulatory lag between the OFT held position , that the public are not good purchasers and a new paradigm where pensions are purchased for the quality of their investments (not their price).

If this is the case, it may be that price comparisons will become obsolescent and be replaced by value for money comparisons. The PPI observe

The FCA is of the view that “low engagement, complex charges and a lack of awareness of charges prevent consumers from finding more competitive products” which in turn leads to a market place that is less competitive on charges

But conclude

There are several reasons why a member might transfer their pot from the scheme originally chosen by their employer…

Charges are unlikely to be the main motivation for members to transfer

Whether “members” are self-harming or self-improving is a question the PPI’s report leaves hanging.

And how will the market evolve?

We are moving from a world of small DC balances and weak governance to one of consolidated pots, consolidated schemes and improved governance. The FCA has created IGCs and GAAs that have made marked improvements not just in workplace but in the insured legacy’s VFM. The master trust assurance framework has ensured that governance of multi-employer schemes is consistent and good. The average pot size of those transferring to consolidators is reported by the PPI to be £45,000, meaning that the consolidators such as Pension Bee can offer tiered charging structures that mean those with large balances can get better deals than in comparable funds within workplace pensions (I know this to be the case for me).

Those with smaller pots, have the option to move those pots to consolidators and often this will improve their VFM as they move away from flat rate charges which are ruinous to the small pot. If they can find enough money to access a good quality consolidator, they can usually get a better deal not just on service but on cost. If they cannot transfer for themselves, they may find some help from the work of the small pots group – especially if they benefit from “member exchange” or some form of “pot follows member”.

I am encouraged that the retirement savings market will evolve positively for members of pension schemes and policyholders with legacy products. There is a flourishing consolidation market , competing hard for our money

The PPI make a very balanced argument for and against consolidating away from workplace pensions

Leaving a qualifying scheme can result in increased charges.
There is very limited charge impact when considering non-qualifying workplace schemes, which includes funds outside of the default investment strategy. When transferring to other pension providers, including SIPP providers, this may result in an indicative increase in charges from around 0.5% of funds under management to around 0.75%.

To offset any potential increase in charges a more beneficial investment strategy must be sought. For an increase in charges of around 0.25% of funds under management a year, long-term returns would need to be improved to match, potentially offset by a preference for volatility management.

The wide range of default investment strategies available across qualifying schemes means that much of this can be achieved in charge-capped funds. However, for an engaged investor wishing more control over their investments they will need to take an active management approach which is not available in capped arrangements, and not suitable for small funds

However, any argument on the future destination of our retirement savings has to consider the eventual spending of the pot (even if this is by another generation).

When we move into “decumulation”, we discover the charge cap is much less in evidence and conditions for the consumer are much as they were before 2014.

This must be the subject of further research (and further blogs).

About henry tapper

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