A one per cent cost saving over 40 years could lead to an extra 25 per cent in the value of a pot at retirement.
The combination of pension deficits in defined benefit schemes, the challenges of ensuring good member outcomes in defined contribution schemes, and and a general mistrust of pensions, means that policymakers and regulators – are demanding improved governance of pension schemes.
This improved oversight will help prevent the prospect of a reduced or a less secure retirement income for members.
A part of that focus is to improve awareness of costs and charges, by demanding a greater transparency of costs across the value chain, and throughout the accumulation and decumulation phases.
Discussion on costs may feel distant from the day-to-day running of a pension scheme, however, it is clear that they can have a significant impact on returns.
Research shows that the true cost of owning a pension scheme, after full cost disclosure, is actually between 2-5 per cent per annum.
Making small savings early can generate significant gains over a long period – for example, a one per cent cost saving over 40 years could lead to an extra 25 per cent of value at retirement.
Assessing good value for members of DC pension schemes is not a new subject for trustees and the pensions industry. It is, however, an area that many find challenging to accomplish in a consistent and effective manner.
For example, Independent Governance Committees (IGCs) are obliged to scrutinise the value-for-money of a provider’s workplace personal pension scheme, taking into account transaction costs, and are to raise concerns and make recommendations to a provider’s board. The main question is how.
The Local Government Pension Scheme Advisory Board’s Code of Transparency has been instrumental in standardising a consensus on cost transparency, with 803 asset managers signed up to the code.
This framework has standardised the cost collection process and has enhanced the knowledge and understanding of investment costs, ultimately promoting greater accountability and aiding good governance.
Following the FCA asset management market study, and as part of the subsequent remedies package, the FCA established the Institutional Disclosure Working Group (IDWG) to build on the progress of the LGPS Code of Transparency.
The group ultimately aims to achieve a final consensus on a set of cost disclosure templates for UK pension schemes, which will be a big step forward in achieving a standardised approach to the collection and reporting of costs.
Even with the potential of an established standardised framework in the UK, costs are a complex area that trustees and pensions executives need to get to grips with.
We advocate that costs must always be viewed in context of risks and returns, and we emphasise that costs are only one element of assessing value for money.
Please download our guide, which aims to help you develop a good working knowledge of the various costs associated with managing a pension scheme, enhancing the way you can make informed decisions on behalf of your members.