Today, the National Association of Pension Funds published draft proposals for an industry code of conduct for pension charges. Here, Standard Life head of pensions policy John Lawson (pictured) explains why he thinks the code will not work in practice – and what policymakers and the industry can do to make charges more transparent.
10 reasons why the NAPF charges code and guides will not work
1. Advisers already negotiate keen charges on behalf of their employer clients – there is no need for employers to bother with the task of understanding and negotiating charges.
2. The employers whom the code is aimed at have no choice of scheme and therefore have no need to compare charges. By definition, if an employer does not have an adviser (and therefore needs the NAPF code to inform them about comparing charges) it is probably because they are commercially unattractive (unwilling to or unable to pay the necessary fees).
These employers will also find it difficult to access a private sector scheme without an adviser, because most private sector providers only deal via intermediaries, not direct with employers. So these employers will only have a choice of one provider – Nest. Therefore, no charge comparison is necessary.
3. The code relies on advisers and providers/administrators/fund managers/trustees collaborating to produce a single document – which one of these parties will take ownership? Are these parties seriously going to share market sensitive cost information to allow a joint charges document to be produced?
4. Cost. This document is another layer of cost in the scheme tender process – with charges in this market already highly competitive, none of the market participants will want to incur extra costs.
5. Adoption of the code is voluntary. It will be routinely ignored as a result.
6. Even if every industry body (ABI, NAPF, IMA, SPC, IFP, AIFA, PFS, PASA, ICAS, ICAEW, AMPS) made this code mandatory for members, not all market participants are members of these trade associations.
7. The output is meaningless to the employer anyway. The comparison is for a median earning individual paying in 8 per cent of band earnings. There are no UK schemes that exactly fit this model, therefore the illustration is misleading, because your members are all different from this one and even your average member is different.
8. There is no common currency to allow charges to be compared. Some schemes may be employer consultancy fees plus member AMC, others may be employer consultancy and admin fees with the member only paying for fund management and other models may load all costs onto the member via charges to pay for commission or consultancy charges.
How is it possible to find a single comparator for these? FSA new business illustrations use reduction in yield but calculating the RIY in this situation would be extremely challenging.
9. More accurate charge disclosure documents (Key Features Documents and Key Features Illustration) already exist, these accurately display charge data on a comparable basis (RIY) for each individual member. These are mandatory for contract based schemes but some providers produce these documents for trust based scheme.
10. Business to business advice is not a regulated activity and employee benefit consultancies do not treat it as such. They are unlikely to want to formally disclose their fees and charges alongside service providers’ fees and charges on a single disclosure document.
If the NAPF proposals don’t work, how do we make charges more transparent?
– One positive from the NAPF draft guide is that charges for services are clearly set out in a graphic, user-friendly format, even if the numbers are virtually meaningless.
– KFIs and SMPIs are not particularly user friendly. However, charges info in KFI is much more accurate and relevant than info in NAPF guide.
– DWP and FSA are already planning to harmonise SMPI and KFI.
– The DWP/FSA project should be widened to consider all charges – such as those within the TER but not in the AMC and perhaps those outwith the TER (mainly brokerage and stamp duty). Should these be included or not?
– The output from this single illustration must be user-friendly and have:
a) Common charge comparison
b) Ideally projected values in today’s money.
c) Ideally a range of outcomes and the likelihood of these outcomes actually happening (e.g. stochastic projections)
– Industry bodies should lobby Government to take this forward.
– It should be mandatory for all trust based pension schemes, including unbundled schemes, to show charges and illustrations on the basis agreed between FSA/DWP and the industry.