“VALUE FOR MONEY” IN PENSION FUND CHARGES
Pension charges have been under regulatory scrutiny for many years. Back in 2001, the Stakeholder Pension charge cap limited pension charges to 1% of fund value – and since then, there has been ever more focus on pension costs for workplace and individual pensions.
When automatic enrolment was introduced in 2012, the initial regulations did not include any limit on scheme charges.
But from April 2015, separate regulations were introduced to address this and limit charges to 0.75% of funds under management (or equivalent for schemes with a mixed charging structure), although this cap only applies to scheme default funds.
The last few years have seen regulatory oversight stepped up, with Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) and Markets in Financial Instruments Directive II (MiFID II) each introducing measures for greater transparency of costs.
Since April 2018, chairs of trust-based Defined Contribution pension schemes have been required to include an update on scheme charges and transaction costs in their annual statements, and they have also been required to make this information freely available to scheme members.
From November 2019, this statement also has to include an assessment of value for members from the trustees, which states either that the scheme represents value for money and why, or that the scheme is not providing value and explain how this will be addressed.
CHARGES ARE TOO COMPLEX FOR CONSUMERS TO BE ABLE TO COMPARE. SIMILAR CUSTOMERS CAN PAY VERY DIFFERENT CHARGES – THOSE PAYING THE HIGHEST COULD BE LOSING TENS OF THOUSANDS FROM THEIR PENSION OVER THEIR WORKING LIFE
The rules for contract-based schemes are slightly different. Since April 2015 all providers of workplace pension schemes have been required to set up an Independent Governance Committee (IGC). IGCs are responsible for the oversight of these schemes and part of their remit is to review the value for money for scheme members. Since their creation, IGCs have been credited with reducing the annual charges on around £25bn of assets, out of the £26bn identified by the Office of Fair Trading as at risk of being poor value for money.
The change in focus from regulators is an acknowledgement that assessing quality in a pension scheme is about more than just cost. The Pensions Policy Institute (PPI) made this point quite firmly in its recent report on pension charges.  Mark Baker, senior policy researcher at the PPI, said: “Charging structures and levels do have an important part to play in determining savers’ retirement outcomes, but they should be understood alongside a number of other factors such as contribution levels, investment strategies, the impact of accumulating multiple pots, the strength of governance oversight and member communications and experience.”
One of the issues with a value for money assessment is that it will prove difficult to compare value for money across different workplace schemes. In fact, the Pensions Regulator’s guidance states that “different methods are likely to be appropriate, depending on the scheme”.
Where the guidance is clear, however, is on what needs to be covered. Each scheme must ensure that the assessment is done annually, applies to all scheme members, and reviews the quality of the scheme as well as the cost. The guidance also requires schemes to fully understand their costs and how they compare to the wider market.
The new value for members’ assessment currently only applies to workplace schemes, but there is a strong chance that individual schemes may have to follow suit.
In 2018 the Financial Conduct Authority (FCA) and the Pensions Regulator announced a joint initiative to improve outcomes for pension scheme members and made value for money a clear objective, with both regulators promising further action if necessary.
Early next year regulators plan to consult on a new framework for assessment value for money across workplace and individual pensions. The FCA also has plans for a full review of the effectiveness and scope of IGCs in 2020, including how they assess value for money.
In addition, last year the FCA launched a review of competition in the personal pensions market, and in an update issued in July 2019, found that individual pensions were too complex and leading to mixed outcomes for consumers.
The FCA said: “We found that a lack of consumer engagement, combined with complex and confusing products and charges, has led to a lack of competitive pressure in the non-workplace pensions market – covering £470bn of retirement savings.
“Charges are too complex for consumers to be able to compare. Similar customers can pay very different charges – those paying the highest could be losing tens of thousands from their pension over their working life.”
Charges and value for money are not just an issue for accumulation. In July this year, the FCA announced some key changes in the charges area for customers going into drawdown as a result of the Retirement Outcomes Review, which kicked off in 2016 to investigate how consumers and providers were responding to the pension freedoms.
The regulator will require firms to send annual information on all the costs and charges paid over the previous year by consumers who have accessed their pension, expressed as a single pounds and pence figure.
Another remedy it has introduced as part of this review is investment pathways for non-advised customers who are moving into drawdown, effectively default funds, which will be in force from April 2020. There is increasing pressure to include a charge cap for these funds. The regulator is also considering extending the role of IGCs to oversee the pathways.
To improve outcomes across the board, the FCA is also considering investment pathways for pension investors in accumulation. The FCA is due to publish an update on its review of competition in non-workplace pensions in the first quarter of 2020 and investment pathways for accumulation, including an element of lifestyling and a potential charge cap, is on its list of potential measures to boost competition and improve outcomes.
Advisers need to focus on more than scheme costs
There are several issues with trying to use value for money as a way to assess and compare pension schemes. Without any standard methodology to use to compile a value for money assessment, there is considerable flexibility for schemes and providers to produce their own method and this will make it hard to compare different schemes or providers.
But overall, the new assessment is a timely reminder that the overall quality of a scheme does not depend on just one metric. The quality of a pension plan needs to be considered across a range of measures, including the cost for members, consistency of investment returns, quality of customer service and administration and the quality of oversight and governance.
 Work and Pensions committee, evidence hearing, February 2019.
 Pension charging structures and beyond; an outcomes focused analysis. The Pensions Policy Institute, September 2019.
 Feedback statement 19/5. The Financial Conduct Authority, July 2019.