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Ian Naismith: Forget charges, investment is key

As automatic enrolment gathers pace, a rapidly increasing number of employers will choose a pension scheme for their staff, many of them for the first time. But how will they decide?

The Scottish Widows Workplace Pensions Report for 2013 reveals the top three features employers expect to take into account are investment performance (highlighted by 48 per cent of employers), charges (35 per cent) and industry experience (30 per cent). So employers want good returns, good value and the confidence that the provider understands the market and can help them with their responsibilities.

Despite the ongoing hype about charges, these may well be the least important of the three. With any advice paid for separately, the effect of charging differences is likely to be marginal as the ABI pension charges calculator on the TPAS website demonstrates.

Using the default inputs and a typical automatic enrolment 0.5 per cent annual management charge, charges reduce the value at the end of five years by 1 per cent – which equates to just £34 – while over a 31 year contribution period the overall effect is just 6.9 per cent. With Nest, the effect of charges is higher after 5 years (2.4 per cent) but slightly lower after 31 years (6 per cent). Fund managers’ transaction costs will increase these figures but where default investments are trackers the additional costs should be low. 

Industry experience could be crucial for many employers. The ability to integrate with payroll systems, segment staff, produce employee communications and maintain audit trails could make the difference between success and failure. The quality of the support offered is likely to vary widely among providers.

But investment approaches may turn out to be the biggest differentiator between automatic enrolment schemes. If we take the “new” providers as examples, the People’s Pension uses a well-established risk-rated lifestyling approach, Nest operates target date funds with risk-reduction at the start and end of members’ careers while NOW:Pensions uses a single-option investment approach designed to produce stable returns.

We cannot yet say which will perform best but can safely assume that differences in final outcomes will be affected much more by investment returns than by charges. Employers who self-select are likely to have little interest in different investment philosophies but where an adviser is involved the employer must understand the approach. There are really two issues. One is the basic investment approach, and how well that fits with the employer’s preferences and the needs of staff. The other is the quality of governance.

Following the OFT review of workplace pensions, providers need to take decisive action to put the issue of charges behind us once and for all.

Ian Naismith is head of pensions market development at Scottish Widows



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