Why we believe in clearer pensions charges
Jamie Jenkins, head of workplace strategy at Standard Life, looks at the new agreement concerning the disclosure of pensions charges and whether it really will help us understand whether we are getting value for money.
This month the Association of British Insurers (ABI) announced that 14 leading pension providers in the UK, including Standard Life, have signed up to an agreement to ensure pension charges and costs to employees in workplace pension schemes are disclosed in a consistent and straightforward way.
There has been considerable scrutiny of pension charges over recent months. And rightly so. With employers starting to automatically enrol their employees into their workplace pension schemes (Read Workplace pensions: what it means for you), employees should be able to feel confident that they are receiving value for money. And that can be difficult to determine, if charges are not presented in a clear and consistent way.
Charges are complicated
However, pension charges are complex, so disclosing them in a simple way is not always as straightforward as it sounds. At the moment, charges are generally displayed to employers and employees as an Annual Management Charge (AMC). This charge takes the shape of an annual percentage of the fund, usually 1% or less, and covers the cost of managing the product, the service provided, the basic cost of investment and the margin of profit for the pensions provider.
For some funds, there are ‘additional expenses’ which include things like custody or auditors’ fees, where these are incurred.
In addition to the charges, there are also costs involved in running investment funds, such as Stamp Duty and brokerage fees. These are necessary costs incurred in buying and selling assets in the markets.
Getting value for money
The good news is pension charges have reduced dramatically over the last decade, and continue to fall thanks to increased competition. However, the way in which they are explained is not always consistent and in many instances they are difficult for people to understand.
That’s why last summer, many leading pension companies agreed that more needed to be done to demonstrate to customers that they are receiving value for money. And now the ABI has announced that the industry will be making improvements to the way in which charges are shown when employees join a workplace pension scheme and receive their annual statements.
The precise way in which charges will be presented in the future is still to be finalised and the planned changes will be phased in, with the first being made by summer of 2014, and the last of them by the end of 2015. This will mean that for the majority of employers setting up a workplace pension for the first time, their employees will be able to clearly see the charges being applied to their pension.
The challenge for the pensions industry is finding a balance between providing relevant information and not over-loading people with information that may only serve to confuse.
As someone once said to me, trying to deal with the large quantities of information you receive nowadays often feels like ‘trying to sip from a fire hydrant’. I’ve never done that, but I can imagine. Too much detail and information can make things more difficult, not easier.
So while there is still some work to be done, the ABI’s announcement is a positive step in the right direction.
One final thing to bear in mind is that while charges will always be important, they should not be looked at in isolation. The Pensions Regulator has highlighted value for money as just one of six key factors that will help to ensure that people who invest in a pension will achieve a good outcome when they come to retire.
The other factors, such as knowing how much to save into your pension, where it’s invested, the quality of service received, the safety of the money you invest and the decisions you make at retirement, are just as important too.
Jamie Jenkis is head of workplace strategy at Standard Life.
What do you think? Do you want more information on exactly what you are paying for from your pension? Or is there a danger that too much information will cause confusion? Let us know your thoughts in the comment box below.