By Martin Parish, head of pension consulting at Aon Employee Benefits.
Who cares about pension scheme charges any more? Legislation has reined in the worst excesses of pension suppliers; trustees or employers keep an annual eye on provider costs – and it’s perceived that scheme members rarely delve into the nitty-gritty detail of their annual statement. Right? Perhaps, but there’s more to caring about charges than a simple tick-box exercise. Charge and value are fundamentally linked. If you want to answer the bigger question of whether your scheme is offering good value for its members, you need to care about charges.
Caring about charges…
In April 2015, the government set a maximum annual charge cap of 0.75% for any member of a defined contribution (DC) pension scheme who invests in the default fund. With such a stringent, legally binding limit it’s tempting to think that charges are taken care of. But even within the cap there is plenty of scope for negotiation. All administration charges as well as fund charges must be included in that 0.75%. If your scheme is paying more than it could or should for its administration, that will limit the proportion of the charge that is left over to support good quality investment management in the default fund.
Depending on the type of scheme that you have, you may have more control than you think over that division between admin and investment costs.
In schemes run by a trustee board, it’s the trustees’ duty to care about charges, and the Pensions Regulator’s DC Code makes it clear what they need to do as part of a well-run scheme. Trustees have a wider remit than just checking how the charge cap is being managed - they must assess other types of cost that are not included in the cap. They are required to calculate those at least once a year and publish them in the chair’s statement. And, it’s not enough just to record what they’ve done, they must also actively work with their scheme providers to bring charges down wherever possible.
When there’s no trustee board and pensions are outsourced to a third party, the job of caring about charges falls to the employer. Like trustees, they too should be pushing providers to lower costs wherever it’s appropriate on members’ behalf – and reviewing their provider if the current supplier is reluctant to do so.
…and their link to value
So far, so good – but charges can really only be properly evaluated when you look at value for money, and how that translates into value for members. That means making sure that charges are viewed in the wider context of scheme design and delivery – in other words, what you are getting for your money.
Some employers might argue that, as the amount of cash they are putting into members’ pensions increases, keeping charges low is their one and only priority - even if it means compromising what the scheme offers. There are two counterpoints to that argument. Firstly, deciding what good value looks like for a company scheme and making sure that you get it, becomes ever more important as contributions go up. Is money being spent in the best way by the pension provider – and if not, how could it be better spent?
Secondly, there is now another category of person who is starting to care about charges and value: chief risk officers (CROs). CROs’ focus will be on making sure that the pension scheme has a ‘clean bill of health’. That could include making sure that members’ assets are safe, ensuring that they are confident the pension provider will remain viable for the long term, and checking that the scheme’s overall governance is up to scratch. They will need to weigh up all of those factors against scheme charges to make sure that DC pensions pose as little risk as possible.
Moving pensions quality management away from thinking about charges in isolation and towards focusing on scheme value puts the spotlight on other aspects of scheme design as well. These could include quality of scheme communications and how effective those are at encouraging members to engage with their pension. The outcome of that will be encouraging them to build the biggest possible pot for retirement, as well as making sure that they appreciate the contributions that their employer is making towards that. Giving members access to suitable education, support and advice services as they start to plan for life after work is another factor that is growing in importance. They will want to know what their options are after the age of 55, and how they can access them. Simply eliminating that support in the interests of low charges is a false economy for both employers and scheme members.
On the face of it, charges might look like a simple compliance matter. But they only make sense in terms of their relationship with value. You can’t have one without the other.
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