How will the pension reforms impact on annual management charges?

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  • Auto-enrolment and the other pension reforms have put the spotlight on annual management charges (AMCs).
  • Employers may be faced with higher AMCs for existing scheme members if they decide to use their current pension scheme for auto-enrolment.
  • The national employment savings trust (Nest) will offer an AMC on the total value of the member’s fund of 0.3%, as well as a charge of about 1.8% on each new contribution into the trust, until the set-up costs of the scheme have been met.

As the pension reforms approach, employers should seek the best value annual management charges, says Nicola Sullivan

Auto-enrolment and the rest of the pension reforms that begin taking effect this year have drawn annual management charges (AMCs) into the spotlight, with employers wanting to get the best deal for low and high-earners.

John Yates, head of client management at adviser Helm Godfrey, says: “Charges are under the spotlight because of Nest [the national employment savings trust] and auto-enrolment. Employers will be fielding questions from their employees, so they will need to be able to defend their scheme’s position.”

Regardless of whether an employer chooses to adopt Nest for auto-enrolment, it is an obvious point of reference for compensation and benefits professionals when deciding how their organisation’s pension provision should be structured to comply with the legislation, which will affect the UK’s largest employers from October this year.

Nest will offer an AMC of 0.3% on the total value of the member’s fund, as well as an additional 1.8% on each new contribution into the trust, until the scheme’s set-up costs have been met. James Biggs, head of corporate pensions – workplace savings at Lorica Employee Benefits, says this structure is reminiscent of pension schemes in the 1980s, when multiple charges were common. “There is a whole array of arrangements other than mono-charges that exist already this year,” he adds.

Nest competitor Now Pensions offers a multiple-charging structure of an annual investment charge of 0.3% and an administration charge of £1.50 per month per member, falling to 30p per month for staff earning £18,000 or less. Morten Nilsson, chief executive at Now Pensions, says: “We feel it is good to have a combination of an admin charge [linked to the underlying administration cost] and an investment charge. This means you are not subsidising membership; there is cost recovery on members from day one.”

Total expense ratio

By contrast, B&CE’s The People’s Pension has a single AMC of 0.5%, which covers both investment and administration. This charge is exactly the same as the total expense ratio (TER), which shows the fund’s annual operating expenses. Jamie Fiveash, director of customer solutions at B&CE, says: “In the pensions industry, there is no consistency over what an AMC is. That is one of our big issues.”

Another challenge for the industry is the fact that the auto-enrolment demographic could be costly to administer because a large proportion will be lower earners and transient workers, who are likely to build up small pension pots. Many pension providers may not see this as a good business proposition.

Employers with existing pension schemes may find adding auto-enrolled staff to the mix results in higher charges for all members. This may make it preferable to use Nest, or a pension geared towards the target audience. Edmund Downes, pensions manager at Aviva, says: “It is possible, if an employer is targeting very small levels of contribution on highly mobile workers, that the actual costs will have to go up. But what is more likely is a split between Nest and non-Nest staff.”

Fiveash adds: “Once an employer picks a scheme, it is unlikely to want to move it again. Our concern is about sustainability. Is the current rate [of charges] sustainable?”

Employers might be able to negotiate better deals and reduce charges on their existing schemes, especially if they are well established with a number of funds under management, says Yates. They should also check that their scheme is on their provider’s latest administration platform so they do not miss out on efficiency savings.

So, ahead of the reforms, employers need to consider the structure of their pension schemes’ AMCs to ensure these are fair for both low- and high-earners.

Read more on annual management charges (AMCs)