Topic: charges

Why inclusion in pensions matters – and how providers can make schemes more accessible for savers

There’s been much talk recently about inclusion and diversity within the pensions market – and quite rightly so. With auto-enrolment opening the door for millions to start putting money into a pension pot for the first time, we all have a responsibility to meet the needs of this increasingly diverse mix of pension savers.

Going by the dictionary definition, the word ‘inclusion’ is described as, “…the fact or policy of providing equal opportunities and resources for people who might otherwise not get them…” 1. We’ve seen great strides being taken to build equality within the industry, especially when it comes to increasing diversity within company boards and governance committees.

However, it’s the part about access to ‘resources for people who might not otherwise get them’ that really resonates with me. For me, inclusion goes even further as it also applies to the actual pension schemes available to savers.

How can pension schemes become more inclusive and what are the challenges?

Auto-enrolment has been successful in bringing more people into workplace saving. This includes those previously under-served by the wider financial services market, who now have more opportunities to save for their future.

This has been a positive step forward, but the challenge now is for providers to be inclusive and accessible for all types of savers. To do that, we need to walk in our customers’ shoes and gain a greater understanding of what’s important to them and the support they need from us.

In our ‘New Choices, Big Decisions – 5 years on’ research, we found savers want simple, straightforward advice and options instead of the complex decisions they currently face when considering their pension.

We shouldn’t expect savers to be financial experts, and we must be careful not to bombard them with information or complicated options. We’ve seen the negative connotations of this approach from Sweden’s PPM top-up scheme in 2000, which encouraged savers to choose from a range of 456 funds. Over 66% of savers chose to self-select but were materially worse off than those in the default fund.

Offering greater choice remains a vital consideration for pension providers. We must balance this by providing targeted funds that match savers’ beliefs and views – such as Shariah and Ethical funds – and their specific needs, rather than offering 100s of options that may exclude them from reaching the best financial outcomes.

Building the inclusive pension scheme of the future

For schemes to become more inclusive going forward, the industry must also consider how workplace pensions form part of the wider landscape of retirement planning.

Initiatives such as the government’s pensions dashboard project – which we’re strongly backing – look set to make pensions more accessible. However, with other factors such as the State Pension, ISAs and inheritance impacting when members access their pension pot, the challenge for the industry is to help savers to see the bigger picture.  

I believe engagement will play a major role in how we cut through this noise – but we must focus on making it easier to reach savers in a way that suits their day-to-day needs. Some may prefer to be contacted by phone or receive written documents available in different languages and formats. For others, a digital online option will be their ideal way of accessing information about their pension. This is one of the reasons why we’re investing in our own digital proposition, to make this as user-friendly as possible for our customers.   

More flexible retirement options will also help schemes become more inclusive. Not everyone will want an annuity, for example, while some may want to continue working when they reach retirement age. Again, it’s up to us provide the right options that can adapt to the individual circumstances of savers.

This last point has been a key focus for us throughout our 80-year history. We’ve constantly adapted to provide products that help people build financial foundations for life – from a holiday stamp system to affordable life insurance. We now run one of the largest workplace pensions in the UK, serving over 6 million members and more than 100 thousand employers. We’ll continue to do so to ensure all our customers have the best chance to save towards a better retirement.

References

  1. Inclusion noun – Definition, pictures, pronunciation and usage notes | Oxford Advanced Learner’s Dictionary at OxfordLearnersDictionaries.com

Less than half of UK savers care about the charges they pay on their pension – latest research

Fewer than half of UK adults with a pension (48%) say they ‘care’ about the charges they pay on their pensions, compared to seven in 10 who pay close attention to what they pay for a mortgage (71%) or current bank account (70%), latest research from B&CE, provider of The People’s Pension1 has revealed.

A YouGov poll of 1,618 UK adults2 with a pension found that, of those who say they don’t care about what charges they pay on their pension, almost one in five (18%) haven’t got round to looking into or thinking about what they are paying, 16% think they don’t have enough currently saved for charges to make a difference and 14% say they don’t believe charges will make a difference to their pension savings when they come to retire, despite there being clear evidence that higher charges can negatively impact somebody’s retirement savings over the long term.

Meanwhile, a further 14 per cent say they trust that their pension companies’ charges are reasonable, just over one in 10 say that pension charges are too complex to understand (11%) and 10 per cent that it’s too difficult to find out what charges they pay.

Today, in a bid to improve transparency, the provider is calling for all pension schemes to include their charges in pounds and pence on annual statements.

The findings of research come as B&CE3, provider of The People’s Pension, a leading automatic enrolment provider in the UK, announces that it has now given £20 million back to its members in rebates through its charging structure4.

Phil Brown, director of policy at B&CE, said:

“This research is further evidence that the average saver doesn’t understand the impact that charges can have on their pension pot. At a time when people are naturally watching what they spend, it’s important that consumers are aware of what they are paying for their pension, which is potentially the most valuable asset many people own.

“Total transparency around charges is vital. We’ll be adding charges, in pounds and pence, on our members annual statements this year, and are calling on other providers to do the same.”

The survey also found that low charges were important to more than a quarter of respondents (27%) when it came to one of the top three the most important feature of a pension, with only the rate of return on their money invested (36%) and being run by a well-known/trusted company (34%) being considered more important.

The provider believes that the Value For Money (VFM) Framework, currently in development by the FCA and TPR, should be included on pension dashboards to ensure savers have transparent and comparable information before making a decision. It is also calling for the new VFM regulations to be applied to the retail market as well as workplace pensions.

ENDS

A ban on combination charging structures could cost pension savers £1,000s

The government is reviewing plans to introduce a universal single annual management charge for all automatic enrolment pension schemes. In November last year (2021), the results of the Consultation on Permitted Charges within Defined Contributions Pension Schemes were published by the Department for Work and Pensions (DWP). The results confirmed the ban on levelling cash charges on pots worth £100 or less. At the same time, the DWP, which had also consulted on the idea to introduce a single universal annual management charge for workplace pension schemes, announced it would propose next steps on this issue ‘shortly’.

A service that works for our members

While we agree with the government’s good intentions to provide greater clarity and transparency for customers when comparing charges, we don’t think the introduction of a universal single charge is the best way to do it. Pension providers like us have, over time, created a service that works for our members. A little over 2 years ago we introduced a new combination charging structure for our 5m plus members. Any moves to introduce a flat fee for all auto-enrolment schemes would mean our combination charging structure would be outlawed, as it includes a rebate on the 0.5% management charge and a cash charge. This rebate begins once a saver has £3,000 or more in their pension pot, and it increases the more they save.

We think this charging structure works for our membership. We’re a not-for-profit organisation, which means we focus on making things easier and fairer for our members rather than worrying about paying profits to shareholders – we call it ‘profit for people’. We give back a total of more than £1m a month to a considerable proportion of our members, and we’re proud of this. As auto-enrolment matures, this figure is only set to grow, and based upon current charges, we estimate this figure might rise to £34.5m a year in just 5 years’ time.

An additional 3 years’ retirement income

Based on the current combination charging structure, the average earner, saving over their working life with The People’s Pension, could see their lifetime annual management charge eventually fall by more than half to just 0.23%. But if the government implements a universal charge, they could potentially lose out on almost £27,000* – around an additional 3 years’ retirement income.

When we introduced our charging structure in 2020, fairness was a motivating factor because we wanted to reduce the cross subsidy of small, dormant auto-enrolment pots for members who have accumulated a larger pension. 

Bringing in a universal charging structure only for automatic enrolment pension providers would distort the market and put the millions of people saving through auto-enrolment at a disadvantage compared to those saving through retail schemes. This could lead to some workplace schemes increasing their charges for all members.

Our view is shared across the industry

We know that our view is shared across the industry; respondents to last year’s consultation cautioned that the change could lead to fewer providers offering pensions in the auto-enrolment market, which would consequently lead to a reduction in investment offerings.

There are numerous ways to solve the perceived problem of transparency within workplace pensions but banning combination charging structures like ours isn’t one of them. We think that this would be unfair to hardworking savers by removing incentives to save more for retirement, not to mention unfairly targeting auto-enrolment savers.

Patrick Heath-Lay, Chief Executive Officer at B&CE, provider of The People’s Pension

*Assuming a member aged 23 with a starting fund of £15,000, a salary of £30,000 per year, paying 8% gross contributions, investment returns of 5% per annum, inflation of 2.5% per annum, and a retirement age of 68, this could add up to an extra £26,853.11. 

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

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.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

Charge rebate now £1 million a month

The People’s Pension gives back more than £1 million a month to members

The People’s Pension1 has today (October 4th) revealed that it now gives back more than £1 million a month to its members in the form of rebates on its annual management charge (AMC).

Its charging structure consists of three components:

  • an annual charge of £2.50 – equivalent to 21p a month
  • a management charge of 0.5% of the value of a member’s pension pot each year
  • a rebate on the management charge (between 0.1% on savings over £3,000 and 0.3% on savings over £50,000)2

This charging structure was introduced to reward its members for saving more and to reduce the cross subsidy by active members to millions of small, inactive pots which are increasingly created by auto-enrolment.

Since the rebate was introduced last year, The People’s Pension, provided by not-for-profit organisation B&CE2, has, given back more than £12.5 million to its members who have pots above the required threshold.  This figure is only set to increase as individual pots grow, with members on the current structure projected to receive a total rebate of £34.5 million a year in five years’ time.

This comes as the Government is running a consultation on the proposed introduction of a universal charging structure, which could see combination and graduated charging structures, such as the rebate given by The People’s Pension, no longer permitted.

Patrick Heath-Lay, CEO of B&CE, provider of The People’s Pension, said:

“As the UK’s largest independent master trust, we have a responsibility to do what’s best for our 5 million members. This charging structure rewards our members for saving more by using our profits to directly benefit them and improve their chance of a better retirement.

“As automatic enrolment matures, the number of people benefiting from this as well as the total size of the rebate we pay out will grow considerably and could help members to save thousands more towards their futures3.”

ENDS