Up to 40 per cent of legacy money purchase pension schemes are poor value for money as they continue to apply charges in excess of 1 per cent, and in some cases affecting thousands of smaller pot savers, in particular more than 3 per cent, according to a highly anticipated report.
The Independent Project Board’s review of charges, which follows on from an Office of Fair Trading probe last year, found that between £23.2bn and £25.8bn of assets under management out of the £67.5bn audited were exposed to charges of more than 1 per cent.
Around half of these AUM in these legacy schemes, where they were set up prior to 2001, are potentially exposed to charges above 1.5 per cent; between £5.6bn and £8bn to charges above 2 per cent; and around £900m to charges above 3 per cent.
Of this latter figure, around £700m is held by savers with pots of less than £10,000. Of this, over 90 per cent is held by savers that are paid-up and have stopped contributing.
The report found that nearly all AUM exposed to charges over 3 per cent are in schemes with monthly fees or deductions from contributions. The report adds that these schemes are “likely to have complex charge structures”.
“For such savers the impact of monthly fees can result in a very high impact of charges”, the report states.
The IPB estimates that there are around 407,000 savers that have joined schemes in the last three years who could be exposed to a charge of over 1 per cent in the future. Of these, 178,000 could be exposed to charges over 2 per cent and 22,000 to charges over 3 per cent.
The board was set up in February following an Office of Fair Trading review in September 2013 that identified around £30bn of pension savers money being in schemes with charges that are at risk of being poor value for money.
Its report also found some schemes are charging exit fees of over 10 per cent if savers leave their scheme today. This equates to around £3.4bn of AUM, of which £800m is held by savers over age 55, who will be eligible to withdraw their pension savings from April 2015.
The IPB has written to each provider of each scheme where savers are exposed to “high charge impacts” or exit charges, setting out the AUM and the number of savers. It told them that by 30 June 2015 at the latest, they must:
• conduct a review of any actions already taken to reduce charges or other qualitative factors that might justify high charges;
• identify what actions could be taken to improve outcomes for savers and what actions can be taken to stop new savers joining poor value schemes; and
• provide the data, any further analysis and the proposed actions to the relevant governance body.
It further recommended that the Department for Work and Pensions and the Financial Conduct Authority should jointly review industry-wide progress in remedying poor value schemes and publish a report by the end of 2016.
Carol Sergeant, chair of the IPB, said: “The challenge now is for providers and governance bodies to work together under the watchful eyes of the regulators and bring about the necessary changes, so that savers who are not in automatic enrolment schemes can benefit from modern standards and value for money outcomes.”
In January the government confirmed a 0.75 per cent cap on charges for schemes that are used as default vehicles to auto-enrol staff, to be introduced from next April
peter.walker@ft.com, donia.o’loughlin@ft.com
