The Government’s sustained assault on workplace pension charges, which saw the abolition of member-levied trail and initial commissions, consultancy charges and AMDs, has resulted in widespread downward pressure on charges, an indepth report has found.
A 120-page investigation into practices in workplace pension charging has found that for qualifying schemes the average charge for a contract-based arrangement now stands at 0.54 per cent, compared to 0.48 per cent for master trusts, 0.3 per cent for trust-based and 0.42 per cent for unbundled schemes.
The Pension Charges Survey 2016 found 98 per cent of members of qualifying contract-based schemes and 99 per cent of members of qualifying trust-based schemes now pay a maximum of 0.75 per cent.
But 2.7m people in non-qualifying contract-based schemes, which are not being used to meet auto-enrolment obligations, are paying charges averaging 0.86 per cent.
Non-qualifying schemes, whose charges are not subject to the cap and were already typically higher than it, have not generally brought down their charges in response. In non-qualifying contract-based schemes just 21 per cent of members paid charges within the cap, while in non-qualifying trust-based schemes 50 per cent of members paid charges within the cap – both showing little change since 2015.
Among qualifying scheme members, the members of the smallest schemes, which previously charged higher than the cap, benefitted the most. Ongoing charges for qualifying contract-based schemes with 12 or fewer members fell by 0.2 percentage points on average.
The research aimed to measure the impact of charge control measures such as consultancy charging, active member discounts and the 0.75 per cent charge cap and to inform the decision whether some or all transaction costs should be included in the charge cap.
Charges for unbundled trust-based schemes, measured for the first time in the 2016 survey, were typically comparable to their equivalent bundled trust-based schemes, although a relatively small number of closed, non-qualifying schemes charged markedly higher than the average, the report says.
But the report says there has been virtually no improvement in providers’ abilities to report on transaction costs compared to 2015, with many providers, unbundled scheme trustees and their fund managers awaiting further guidance from the Government.
Two providers that had reduced charges for deferred members following the ban on active member discounts said they had lost revenue as a result, while another provider indicated that the impact was not just financial, but also affected their internal resources adversely over the period in which the charges were lowered.
Only one provider was found to be still using consultancy charges in 2016 when the research was carried out, for non-qualifying schemes and affecting around 1,000 members.
In 2016 only one provider still paid trail commission for qualifying schemes – contract- and trust-based – for contractual reasons, compared to four providers using trail in 2015. Due to the ban on member-borne commission this provider had to absorb that cost, since it could no longer be passed onto members.
Royal London director of policy Steve Webb says: “This research explodes the myth that anyone in a pension is at risk of ‘rip-off’ pension charges.
“Well run schemes should have nothing to fear from greater transparency on costs and charges. Trustees and governance committees will welcome additional information which will help them to ensure that their members’ money is invested in a way which delivers maximum value-for-money.”