Different levels of pension scheme charges can have a significant impact on a member’s total pension savings and outcomes at retirement.
For example, the difference between a 0.5% annual management charge (AMC) and a 1% AMC, everything else being equal, can mean a difference of £12,800. This is in terms that can be compared to today’s earnings in the amount paid out in charges over a full working life for a median earner saving 8% of band earnings. That is equivalent to 11% of their total pension pot.
Scheme charges are not just important for employees, or employers setting up new schemes. If a cap is put in place, those employers with an existing scheme are also likely to be required to review their schemes for compliance.
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So, irrespective of whether a scheme is being established before or after any cap is introduced, employers and trustees are likely to seek assurances from providers that they will be comfortably within a cap, widely anticipated within the industry to be set at 0.75%.
And it is not just the level of charges that is important. Some schemes, including Nest (the National Employment Savings Trust), have a combination charging structure that has charges levied on the contributions made, as well as an AMC. The impact of charges can vary significantly, both across different charging structures and across employees, depending on their earnings, contributions, and working and savings patterns.
Different charging structures
It is not yet clear how the government, if it introduces a cap, will account for the different charging structures that exist in the market today. But anyone involved in maintaining or setting up a pension scheme for auto-enrolment should give some thought to what the scheme members will look like, and which charging structure, as well as level, may be most suitable for them.
Finally, the impact of charges on total pension savings should not be considered in isolation, but should be balanced against other quality features of defined contribution (DC) schemes, and their impact on value for money for employers and scheme members.
This will include the default investment options, the governance structures in place, and engagement with members, including support at retirement.
Chris Curry is director at the Pensions Policy Institute