The Association of British Insurers (ABI) has set out an action plan for clearer pension charges and costs in a letter to The Pensions Regulator and the Financial Conduit Unit of the Financial Services Authority (FSA).
Its plan is designed to improve transparency across the whole of the pensions industry and raise confidence ahead of the introduction of auto-enrolment, which comes into effect for the largest UK employers from October 2012.
The letter sets out clear priorities for action towards developing an industry protocol by the end of the year that will ensure:
- A consistent and simple disclosure of charges to employees across contract- and trust-based pension schemes.
- Transaction costs, such as broking fees, are made available to employees in all contract- and trust-based schemes.
- All employees receive regular, clear and meaningful information on charges and transaction costs as their funds build up.
- Existing workplace pension schemes ensure that employees are provided with clear and comprehensive information on their charges.
Otto Thoresen, director general at the ABI, said: “While charges for contract-based pensions have reduced dramatically in recent years, we must ensure that, across all types of defined contribution (DC) pension schemes, information on charges and costs is available, clear and meaningful, and helps employees make the right decisions about their pension.
“Auto-enrolment will have a critical impact on the future retirement prospects of today’s workers. If we are to minimise opt-outs, it will be vital that employees understand what they are paying and have confidence in the pensions they are being auto-enrolled into.
“Both parts of the pensions world need to go further to ensure all workplace savers have the information they need to make the best choices for their future. For too long, different parts of the private pensions system, regulated by two different regulators, have given employees too little information about what they are paying.
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“Openness and transparency are now expected by customers, so we all have to do better. I have written to The Pensions Regulator and FSA to set out what I believe we can achieve together.”
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Fears about charges are putting people off pensions, and the industry must address that by being more upfront about its fees. Communication needs to become simpler and more transparent across the pensions landscape. Savers must not be overloaded with unfathomable small print.
New rules could see up to 8 million people automatically enrolled into a pension, many for the first time. If they’re to stick with that pension then they must be able to gauge whether they’re getting a good deal.
We have been concerned about charges for a long time, which is why last year we kick-started work on an industry code to give better information to employers. When auto-enrolment starts, that code will help businesses pick the right pension for their staff.
This call to improve transparency for employees is a welcome next step and could help build on the charges’ work already being done by the industry. It’s vital that all groups are involved – consumers and employees must not be left out, particularly as this work is aimed at them.
The current regulatory system causes confusion, and having two regulators for workplace pensions does not help. Ultimately the goal is a clear and stable environment that delivers the best pensions possible.
There has been a lot of recent criticism of charges in contract-based schemes. The use of transfer penalties and active member discounts have come under particular scrutiny.
It’s no surprise that ABI wants to aim a kick at trust-based schemes from time to time, though it did recently call for the pensions industry to ‘put these internal debates aside’. However, accusing trust-based schemes of not disclosing charges was shooting from the hip. Trust- and contract-based scheme both have their merits. Employers need to select the approach that best suits their needs.
Otherwise, Otto Thoresen’s letter provides an interesting starting point for discussion of an issue that is not going to go away.
More detail will need to be thrashed out by the industry and regulators. For example, the letter does not spell out whether the disclosure of charges should be limited to percentage rates – as would typically be the case today – or cash sums.
If the idea is that members see ‘pounds and pence’ numbers showing how much they have actually paid, how easy would it be for providers to update their systems to record the data needed to calculate member-specific numbers? More importantly, how much might the cost of doing this increase charges?