Mind the charging gap

For industry professionals, this raises the question of whether these consolidation services represent value for money or whether customers would instead be making a hefty contribution to the marketing spend of a provider based solely on the influence of the featured companies’ branding and advertising.

The Pension Policy Institute has provided us with a comprehensive analysis of the charging landscape. In a recent report, the institute looked at the different charging structures implemented across the industry and their effects on member outcomes. It found that there was a charging gap between capped and non-capped funds. The typical cost in a workplace scheme of 0.5% AUM would absorb the equivalent of 14% of the member’s final pot. At the level of the cap — currently 0.75% AUM — pots would be eroded by 20%. Independent Governance Committees currently use 1% AUM as a benchmark of value for retail schemes, and some SIPPs have total charges that are even higher.

The websites of 2 companies currently advertising for consolidation indicate that their charges would, on this basis, be expensive for many savers compared to the rates they would get from the big workplace master trusts. One consolidator charges a flat 0.75% to all participants. The other starts at 0.5%, but for products that are comparable to the funds offered by capped workplace pension providers, it charges 0.7%. These rates would seem particularly costly if the customer had the choice of consolidating into an alternative master trust that was charging below the average or had a rebate scheme rewarding higher rates of saving.

Higher fees could be justifiable if a more complex investment strategy is used. For example, a fund with more illiquid investments is more costly to manage, but it may offer the possibility of higher returns. However, the retail consolidators’ websites don’t indicate anything else is being offered other than standard index investing. The Pension Regulator (TPR) and the Financial Conduct Authority (FCA) are currently working on a new framework to assess value for money in pensions. This is likely to include metrics that focus on risk-adjusted returns and scheme governance as well as costs and charges. For those considering the consolidation of historic pots, this is potentially going to make it much easier to make an informed decision as to where it is best to bring their pots together. In many cases, this is likely to be a default fund that an employer, with the help of a financial adviser, has selected on their behalf, specifically because it meets the value for money criteria that the regulators are now focusing on.

The work of TPR and the FCA will only deliver for consumers if it helps them to make these comparisons across all the potential schemes for consolidation. To this end, it’s vital to make it a requirement that all workplace and retail pension schemes publish their value for money scores. Value for money should not just be a description but an order: if you do not show the value, you should not be able to accept a member’s money.