LCP attacks providers over ‘alarming’ opaque fees

An alarming lack of transparency continues to surround the fees associated with pension funds, meaning trustees and company management are increasingly unaware of DC pension scheme costs, LCP has warned.

The LCP DC Fees Survey of over 300 funds has revealed that around 30 per cent of DC investment providers were unwilling to provide details of the indirect costs associated with their funds.
The report also found that costs continue to be substantial. For diversified growth funds, which are often used as the default option for DC schemes, total costs were found to be as much as 50 per cent higher than the headline direct annual management charge, often because fees charged by external holdings in these funds are not disclosed. In some instances, where account trading costs were also taken into consideration, the combined additional costs increased to more than 100 per cent higher than the quoted annual management charge.
The report also found providers will negotiate fee levels for growing schemes, highlighting the need for trustees and company management to negotiate fees, particularly when the scheme’s membership profile has changed.
It also found a wide variation in fees from provider to provider, even within identical categories of fund. Bundled schemes can, in practice, be more cost effective than unbundled, while GPP charges are generally lower than stakeholder charges, it found.
The report found that for platforms and insurance companies there are typically additional costs for creating white labelled and blended funds but there is no standard method of charging for providing these services and the cost is assessed on a case-by-case basis. LCP found no explicit charge for white labelled or blended funds, but providers will take these requirements into account when setting the overall terms. It found an additional AMC for each white labelled and blended fund, which would generally be met by the member and a specific annual fixed charge for each white labelled and blended fund, which would be charged separately.
Where an additional charge was quoted for a blended fund this varied from 3 bps pa up to 10 bps pa, or for a fund of £20m from £6,000 pa to £20,000 pa. This compares to the fixed annual charge for blended funds varying from £1,500 pa to £6,000 pa. This means for a £20m blended fund, the difference between the highest and lowest charge is around £18,500 pa.
Heather Brown, investment partner at LCP and author of the report says: “Our first report on DC investment fees shows that the overall costs for DC funds can be substantial, which is a particular concern at this time with the imminent introduction of auto-enrolment and the expected growth in the number and size of DC pension arrangements throughout the UK.”
“More transparency on fees is needed to help employers, trustees and pension scheme as this could lead to lower costs, which should result in larger pensions for members. In particular, attention needs to be paid to the fees charged for the default investment option as this is where the majority of DC scheme members invest.”