Pension charges cap could stifle industry

A cap on pension charges could stifle the innovation and creativity needed in pensions to provide better retirement outcomes for employees.


Speaking in a session titled Does cheap mean low quality? at the National Association of Pension Funds (NAPF) Investment Conference on 6 March, James Churcher, pensions manager at Abbott Laboratories, said that a statutory charges cap could result in a basic pension scheme model comprising vanilla administration services and a fixed asset allocation strategy, for example.

He argued that transparency around charges would go much further towards creating value for pension scheme members. “I would be happy to see transparency on all charges or for these to be included in the annual management charge so people know exactly what they are paying for,” he said.

“Rather than cap fees, we should enable organisations to have a default investment strategy that is better than a basic model. A higher retirement outcome is better than low fees, as long as people can see what they are paying for.”

But employers should also ensure they do not look at pension scheme charges in isolation, said Simon Chinnery, head of UK defined contribution at JP Morgan Asset Management, during the same session.

“The danger of that is we get to know the price of everything and the value of nothing,” he said.

Instead, employers should consider pension scheme charges in a wider context, taking into account factors, such as diversification and dynamic asset allocation, and the dynamic management of multiple risks, including longevity and accumulation risks.

Making income replacement the key focus on pensions strategy is also critical, added Chinnery.

“We get one shot at retirement and need to give it the best shot we can to get as many members over the finishing line as possible,” he said. “There is a payoff between quality and cost. There is a saying: buy cheap, buy twice. Unfortunately, you cannot do that with retirement.”

The government’s proposed 0.75% cap on pensions charges has been delayed until April 2015.