30th October 2013
So is the price of your pension coming down in price asks John Lappin? Certainly a casual read of the headlines would make it look that way. They suggest that the new annual management charge will be 0.75 per cent. This implies that this is much lower than the norm. It is certainly lower than many pension arrangements though some figures suggest that the average for new schemes since 2012 is actually at 0.51%.
Unfortunately as Mindful Money readers will know, it is a lot more complicated than that. So the actual proposals from the Department for Work and Pensions give three options. The first, which may come as some surprise given much of the coverage, is that charges are capped at 1 per cent. The second is that charges are capped at 0.75%. The third is that the cap will range between 0.75% and 1% with schemes having to explain to The Pension Regulator why it costs more than the 0.75 per cent.
So what does it mean for you?
Well the scheme into which you will be auto-enrolled as part of the new workplace pension reforms will have the charges capped probably at something around 0.75% annually. In fact, we’d bet on that.
If you are with a large employer you will already be covered by the scheme and are probably paying a reasonable charge already. Most large auto-enrolment schemes for large employers, many of which have joined already, will be close to or under 0.75 per cent and certainly are likely to be under 1%. If you are with a smaller employer, the reform is being phased in with all employers covered by 2017. Smaller scheme charges tend to be higher so the move to cap charges may be of particular benefit to you.
For those who are paying more at the moment, there could be several reasons.
Your scheme may over a decade old – so your pension may be paying into an old style high charging contract perhaps in an insurance/pension company which no longer seeks new business i.e. it is a closed or zombie insurer. It may not be possible to move the money without a penalty.
It may be a very small scheme with few members, low absolute contributions or a combination which generally sees insurance companies charging a higher price, though if it is an active scheme taking new money, it would be exceptionally rare for charges to be above that 2.3% sometimes being quoted.
It could be a SIPP arrangement perhaps aimed at director and management level employees, and you or your adviser may have selected funds with higher charges inside. The thinking is this should bring you better returns albeit, as we say, with higher charges. In these cases, you need to consider whether you are getting value. We are unsure whether these schemes can really cut the mustard when it comes to complying with auto-enrolment certainly for most employees.
You could have left some of your money invested in an old employer’s scheme rather than transferring it and because you are no longer an employee, you may be charged more. These are known as active member discounts for current employees or more harshly deferred member penalties. The result is that some of your older money may be subject to significantly higher charges which could be pushing above 1%. However regulators particularly the Office of Fair Trading have criticised these charges and wants them phased out or reined in. If these charges apply to a scheme that is being used for auto-enrolment, and you are a deferred member, then you may see charges fall.
In general terms, it was always very unlikely that any scheme on a high charging level was ever going to pass muster for the new workplace pension reforms. It is very likely your employer would have had to alter the scheme anyway or open up a new scheme for new money going on a much lower charging basis.
What can you do now?
The most important thing you can do is ask your employer about the scheme, what you and they are being charged, and is it competitive. But note that if you have money in an old pension plan from a previous employer, it may be up to you to check out whether you are getting value for money.
If it is a plan put into place after April 2001, then you can transfer that money elsewhere with no penalty. Prior to that there may be penalties, which means that it will be less easy to move your money, though once again the Government is putting pressure on pension providers which are reviewing these old schemes. They could even carry valuable guarantees about inflation so it is not a simple decision, even if it is easier to move. But the best advice may be to actively consider where you own past money is invested.
Are there any other implications?
Well, we think it is likely that the big pension providers will become more reluctant to pick up smaller schemes with fewer members. It is likely your employer will offer you a Nest pension, the state created scheme which has to take all schemes that other pension providers won’t.
So the upshot is that the mass of defined contribution pension investors will not be paying more than probably 0.75% and definitely 1% in most circumstances. To that extent, it is a safety measure. We suspect that the vast majority of schemes were not charging substantially more than this. And actually it is possible that lower charging contracts may rise. The investment strategies involved will be on the low cost side. Clearly the government intervention is to ensure that the broad range of pension savers are not facing high charges. That is broadly good news. But if you have money locked away in old contracts, you need to check it out yourself perhaps with the help of a pension adviser.