Personal PensionJul 18 2013

Power of inertia boosts take-up

      pfs-logo
      cisi-logo
      CPD
      Approx.0min
      pfs-logo
      cisi-logo
      CPD
      Approx.0min
      twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
      Search supported by
      pfs-logo
      cisi-logo
      CPD
      Approx.0min

      The level of pension scheme charges has been subject to considerable media attention of late. Pensions minister Steve Webb has been very vocal in his criticism of high and inappropriate charges and The Pensions Regulator cited cost and fair value as essential to achieving “good member outcomes”. The average FTSE 100 pension scheme has an annual management charge of 0.36 per cent for active employees investing in the default option. This compares favourably with Nest which has charges that broadly compare to 0.5 per cent AMC. To an extent charges at this level reflect the buying power of FTSE 100 employers and the size of their DC arrangements. However the trend for charges within the FTSE 100 (and anecdotally, outside) is generally downward. Overall it is encouraging to see that many larger employers already have schemes in place with low charges.

      But what constitutes good value and should charges be the only consideration? This issue is obviously very important to outcomes but whether charges represent good value depends not only on what members are paying but what they are paying for. More sophisticated investment strategies cost more to design, implement and communicate. Better communication is not free. Assessing what constitutes value for money should therefore look at all aspects of a pension scheme, not just the headline level of charges.

      What type of contribution structure best suits an employer after employees are being auto-enrolled? Results show that the two types of contribution structure dominate two-thirds of the market are flat rate and flat rate with matching. Flat rate structures provide the same contribution rate for all members and employer contributions average 9.3 per cent of pensionable pay. Flat rate with matching allows employees to receive a higher level of contribution from their employer if they are prepared to pay more themselves. The average core employer contribution is 5.1 per cent with a further 5.1 per cent available for members who take full advantage of matching contributions, giving an average total contribution of 16.6 per cent when member contributions are included.

      PAGE 2 OF 4