The difference a charge makes to pension savings

For those of you not old enough to remember, there were days when the industry had charge caps of 1.5 per cent for the first 10 years and 1 per cent for the remainder of the life of a stakeholder policy. That’s up to twice the current cap of 0.75 per cent for default investments.

Of course, some of the reduction came as the result of political pressure, in the form of the auto-enrolment charge cap. But added to this was the entry of master trusts into the market, pooling the fixed costs of pension scheme provision over a much larger group of members.

This gave rise to a workplace pensions market that was more competitive and much cheaper.

So you might think not much more needs to be done with lowering charges. But you’d be wrong.

A fairer charge for all

The hard part in setting workplace pension charges is that costs, complexity and fairness trade off against each other. With all this in mind, we reshaped our annual management charge (AMC) last year to strike what we think is the right balance between these three things for our members.

The revised charge structure features an annual £2.50 cash charge, a management charge of 0.5 per annum and a rebate on some of the management charge.

The reason for change

When the AMC is calculated on a percentage basis only, it may result in a low charge rate but high pounds and pence figure for members with larger pots. Conversely, those with very small pots pay a fee that doesn’t cover the cost, or even the regulatory fees, of providing a pension pot.

In an environment where there are millions of small, deferred pension pots, common as a result of auto-enrolment, schemes may rely on members with larger funds to cross-subsidise the costs of managing the smaller pots. This is not a sustainable situation for a well-run scheme and this issue was a factor in the introduction of our annual £2.50 charge.

But we know there’s another underlying issue here – that of the growing number of small deferred pension pots. It’s why we’re working with the Department for Work and Pensions and others in the industry to bring forward a solution to the small pots problem.

Giving something back

As touched upon above, we also cut our annual management charge by means of a rebate which works to help boost members’ pension savings. As a member’s savings hit key milestones – £3,000, £10,000, £25,000 and £50,000, we apply a monthly rebate and automatically add money back into their pension savings. The level of rebate increases at each stage, reducing the impact the charge has on their savings and, in so doing, leaving more money invested for their future.

For someone with £15,000 in their pot, over the course of a typical year, £17 will be added to their pot, with this increasing the more they save for their retirement. This might not sound much to start with, but compound the rebates over the years and they could add a significant amount to an individual’s retirement savings – more than £14,000 for an average earner¹.

Change is the only constant

Nothing stands still and further change is inevitable. We expect the workplace pensions market to become even more competitive with significant consolidation of both providers and pots. We expect the latter to be driven both by dashboards and, increasingly, by government encouraging the industry to automatically consolidate small dormant pots. This will create a tougher operating environment for providers but we expect the emergence of stronger providers with even greater scale leading to lower charges for members.

We’re not there yet but we’ve come a long way in the last 20 years. We hope that the next 20 see as much progress.

Keen to know more about our annual management charge and how members can receive a bigger rebate? Visit our member charge page for all the details.

1. _{Assuming a member aged 35 with a starting fund of £15,000, a salary of £30,000 per year, paying 8 per cent gross contributions, based on qualifying earnings for the 20/21 financial year, investment returns of 5 per cent per annum, inflation of 2.5 cent per annum, and a retirement age of 68, this could add up to an extra £14,566.}