Independent governance committee members are reportedly commanding hefty salaries. This week’s report into defined contribution scheme charges will give members of these new committees a chance to prove their worth
The report was carried out by an independent project board (IPB), set up by the government to oversee a wide-ranging audit of ‘legacy’ defined contribution (DC) schemes.
The audit was instigated by the Office of Fair Trading, which concluded in its September 2013 study of the DC workplace pensions market that it lacked sufficient information to fully assess the charges.
The conclusions of this week’s report paint a damning picture of much of the provision long-standing DC members are signed up to.
Of the £67.5bn worth of assets under management (AUM) audited, nearly two thirds (£42bn) have charges of less than 1%. However this leaves between £23.2bn and £25.8bn of AUM potentially exposed to charges of above 1%. Up to £8.0bn could be open to charges of 2% or more, of which £900m are locked up in schemes where they are paying 3% plus.
Of this £900m, an overwhelming majority is held by savers with pots worth less than £10,000. More than 90% of these savers are either paid-up or no longer contributing.
And the advent of auto-enrolment hasn’t stopped high charging practices. The report estimates that around 407,000 savers, who have joined schemes in the last three years, could be exposed to a charge of over 1%. Of these, 178,000 are potentially open to charges of more than 2% and 22,000 unfortunate individuals have been enrolled in schemes where they are forking out 3% or more.
The committee had to navigate its way through a set of charging structures, which are truly byzantine in their sheer complexity”
The committee had to navigate its way through a set of charging structures, which are truly byzantine in their sheer complexity. They found 38 different types of separate charges. Across the audit, they discovered 291 different combinations of charges.
And the schemes, where savers are potentially exposed to the very highest charges, were also those most likely to have complex charge structures. The board found that nearly all AUM potentially exposed to charges of over 3% was in schemes with complex features, like deductions from contributions.
And it’s not just the so called legacy schemes that offer questionable value, nearly half (£12.4bn) of the AUM in schemes with charges of 1% or more were in post-2001 schemes.
The board has concluded that providers have six months to determine a response to the IPB’s analysis. In the meantime, the IGCs will need to consider their own responses and agree an action plan, to be in place by this time next year, on tackling high charge arrangements.
Tim Sharp , pensions policy officer at the TUC, says: “This is putting a lot of weight on IGCs, given the worries about whether they have the powers to be effective. If they are found wanting, it is important that the government gives them the power they need.”
IGCs will need to consider their own responses and agree an action plan, to be in place by this time next year, on tackling high charge arrangements”
Darren Philp, director of policy and market engagement at The People’s Pension mastertrust, agrees that this exercise will throw a spotlight on what he describes as the yet “unproven” IGCs. “The board have made it clear that they have to get their teeth into this so it could be the making of IGC,” he says.
He doesn’t echo the TUC’s call for poor quality legacy scheme to be ‘named and shamed’ though, given the complex nature of many legacy arrangements. “Naming and shaming can be quite a blunt instrument.”
However, he acknowledges that if any IGCs and providers can’t agree on what actions to take, there could be a case for such an exercise.
Naming and shaming can be quite a blunt instrument”
And he thinks that the government’s efforts to cap charges will prove counter-productive.
“Government efforts to ban certain types of charging practices are futile as the industry will find ways of getting round them,” he says, pointing to the tax system as a comparison.
“You can have an anti-avoidance rule but people will find a clever way of getting round it.”
Government efforts to ban certain types of charging practices are futile”
He argues that a standardised approach to DC scheme charges offers the best hope of establishing effective transparency. “We have situation where different providers are charging in different ways so there is not a common currency. How can you ever hope to establish value for money unless you have total transparency?”
The IPB has rejected the call for standardisation, arguing that “no ‘one size fits all’ charge structure will ensure all savers get value for money all of the time.”
The focus will now shift back from the practitioners of the IPB to the policy makers at the Department for Work and Pensions and the Financial Conduct Authority. The board has recommended should that the department and the agency should conduct a joint review by the end of 2016 on industry-wide progress in remedying poor value schemes.
Without true transparency, we will be soon be back at square one”
However Philp argues that without true transparency, we will be soon be back at square one.
“We have to make sure that consumers aren’t being disadvantaged: otherwise we will be having this same debate in five years time.”