Call for clarity on pension scheme charges

Pension scheme charges can be a mystery to employees, and efforts are under way to make them more transparent.


  • The average annual management charge (AMC) on pensions is less than 1%, according to the Department for Work and Pensions.
  • The Association of British Insurers is calling for greater transparency around pension scheme charges.
  • The National Association of Pension Funds plans to publish an industry code of conduct on pension charges this year.


The Association of British Insurers (ABI) is on a mission to create greater transparency around pension scheme charging structures. The trade body set out an action plan for clearer pension charges and costs in a letter to The Pensions Regulator (TPR) and the financial conduct unit of the Financial Services Authority (FSA) in August. It called for a consistent and simple disclosure of charges to staff across contract- and trust-based pension plans.

In the letter, ABI director general Otto Thoresen said: “While charges for contract-based pensions have reduced dramatically in recent years, we must ensure that, across all types of defined contribution (DC) pensions, information on charges and costs is available, clear and meaningful, and helps employees make the right decisions about pensions.”

The ABI’s call came ahead of the arrival of auto-enrolment for the largest employers last month, which requires all eligible employees to be automatically enrolled into a qualifying workplace pension scheme.

Employers can help to minimise the number of employees who opt out of their pension schemes by ensuring staff are fully informed about their options.

Pension scheme charges typically come in the form of up-front set-up fees, annual management charges (AMCs) and exit fees that may relate to employees who transfer a pension pot between employers.

But there are wide variations in the size of fees and the way they are applied. For example, AMCs on a workplace pension can be a percentage of the total fund, a percentage of contributions or a flat fee per employee.

Ian Naismith, head of pensions market development at Scottish Widows, says: “At the moment, if a company came to us looking for a pension scheme, we would make an assessment of its workforce, looking at earnings levels, numbers, how long employees stay at the company, and would then create a bespoke charging structure.”

But although the costs of a pension clearly affect employees’ retirement funds, other factors are also at play. Laith Khalaf, pension investment manager at Hargreaves Lansdown, says: “Engagement with contribution rates, engagement with starting a pension early and engagement with investments will all have a bigger impact on retirement income than the charges.”

To complicate matters further, new FSA rules, due to come into force on 1 January 2013, will change the way independent financial advisers (IFAs) and employee benefits consultants are remunerated.

Retail distribution review

The retail distribution review (RDR) will prohibit commission-based payments from providers, forcing advisers to charge fees from employers or employees.

Khalaf says: “RDR will make charges more up-front, so there will be less annual charging and more up-front charging.”

This new charging model poses a number of risks in the auto-enrolment world. For example, the up-front deduction of charges from a pension scheme might persuade employees that opting out is a more attractive choice than remaining in the scheme and paying the fees.

So what can employers do to help staff understand the charges? A comprehensive communications strategy is a good place to start. Thankfully, transparency around charges does not have to mean a lengthy statement, but rather concise, pertinent information.

Khalaf says: “One of the main issues around pensions is that people don’t engage with them. Partly, it is the industry’s fault, because the insurance companies used to just send out reams of jargon-infested, lengthy documents that people are going to turn away from because they can’t be bothered to read them.”

The National Association of Pension Funds hopes to help rectify this issue by publishing an industry code of conduct on pension charges by the end of the year.