The average annual management charge (AMC) for trust-based defined contribution (DC) pension schemes is currently 0.75% of the fund per year, according to research by the Department for Work and Pensions.
Its Landscape and charges survey 2013: charges and quality in defined contribution pension schemes comprised a combination of quantitative research with private sector employers that offer a DC pension scheme, supplemented by qualitative and administrative data supplied by providers and other industry participants.
It was designed to explore charging levels and structures in trust and contract-based pension schemes, and to understand the characteristics of schemes that maximise the chance of better outcomes for members.
The research found that this figure of 0.75% for trust-based schemes has not changed significantly since 2011, when the average AMC was reported as 0.71% overall.
Among contract-based pension schemes, the average AMC has fallen slightly, from 0.9% in 2011 to 0.84% in 2013.
The key determinants of the average AMC were:
- Size of the pension scheme: Members of smaller schemes (12 to 99 members) paid a higher-than-average AMC (0.91%) in both trust-based and contract-based schemes. In contrast, members of larger pension schemes (1,000 members or more) paid an average of 0.42% in trust-based and 0.51% in contract-based schemes.
- Commission: Where a commission-based adviser was used, this led to an average increase in the AMC paid by members of trust-based schemes of 0.4 percentage points and, in contract-based schemes, of just less than 0.2 percentage points.
- Contributions: Higher contributions led to a lower AMC being paid by pension members.
- Pension scheme age: Older pension schemes tended to charge more.
The research also found:
- Two-thirds (64%) of trust-based schemes had used an adviser in relation to their scheme in the past year. The likelihood of having done so increased with pension scheme size: 85% of trust-based schemes with 1,000 members or more reported using an adviser, compared to only 44% of smaller schemes.
- Where employers with a trust-based scheme paid a fee for advice, this was £180 per active member on average, while those with contract-based schemes paid £140 on average.
- Larger pension schemes paid less on a per-member basis, and almost all employers claimed that such fees were never passed onto members.
- Some providers offered lower AMCs to members currently contributing to the scheme (active members) than to members no longer making contributions (deferred members).
- Only 3% of trust-based and 10% of contract-based schemes reported using such active member discounts (AMDs), charging deferred members an average of 0.38% more.
- The majority of contract-based plans and two-thirds of trust-based schemes offered members a choice of investment funds, although providers pointed out that between 80% and 95% of contract-based scheme members were invested in a default fund.
