- Workplace pension scheme ‘default’ funds are at the heart of efforts by UK regulators to improve comparability of value-for-money in pensions (Feedback statement on driving Value for Money in defined contribution pensions | The Pensions Regulator)
- Three key components of value-for-money being considered:
- Investment performance
- Customer service and scheme oversight
- Costs and charges
- Decision to focus attention on automatic enrolment schemes makes sense given the size of the market and lack of engagement among savers
- FCA and TPR want to extend value-for-money comparisons to non-workplace pensions in the future – although not clear how this would be achieved
- Even tiny differences in charges can make a big difference to someone’s retirement
Tom Selby, head of retirement policy at AJ Bell, comments:
“There are few policy issues in financial services as important as ensuring good outcomes for defined contribution pension savers.
“Part of this rests in making sure these customers get value for money. This is particularly pressing in the automatic enrolment market, where over 10 million people have been brought into pension saving in recent years.
“Lots of these people will be new to retirement saving and have little or no desire to engage with their retirement pot at all.
“In fact, ‘double defaulters’ might fail to engage both in the savings phase and when they come to take a retirement income. This lack of engagement leaves people more at risk of receiving poor value from their pension.
“What’s more, when it comes to auto-enrolment the employer will have chosen the pension scheme on behalf of their members – meaning there is a significant power imbalance between buyer and seller.
“The weakness in these competitive dynamics means savers are potentially in greater danger of receiving poor value-for-money – which is one of the reasons a charge cap on default funds was introduced.
“It therefore makes sense for regulators to focus their attention on this part of the market. If comparability can be improved, trustees and employers should be in a better position to compare the value on offer from different providers across the market.
“However, it is much less clear how standardised value-for-money metrics could be applied to the non-workplace pensions market.
“People who invest in products like SIPPs are already engaged and will hold a range of different investments depending on their risk profile and long-term goals. Applying a one-size-fits-all assessment of value would therefore be of little relevance or use to people with diverse investment approaches.
Instead, the FCA’s work on the introduction of a new Consumer Duty – due to be rolled out over 2022/23 – will help make sure these consumers experience good outcomes.”
The impact of charges
“The regulators are right to focus in on costs and charges as part of the focus on value-for-money. While they are just one component of value, the impact of even small differences can be significant.
“Take for example two basic-rate taxpayers – James and Jane – who each contribute £2,000 a year into a pension, with tax relief of £500 added on automatically.
“Both enjoy 4% per annum investment returns, but while James pays 1% in total charges, Jane pays just 0.5%.
“After 30 years, James’ fund has grown to around £116,000, while Jane’s retirement pot is worth over £126,000.
“In short, by paying just 0.5 percentage points more in costs and charges James has ended up with £10,000 less in his pension pot.”