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Legacy pension audit reveals £26bn exposed to high charges

Billions of pounds of pension savings are locked in old schemes with annual management charges of over 1 per cent and are subject to exit charges if members leave schemes early.

An audit of legacy pensions, published today by the Independent Project Board, revealed the scale of assets locked-up in schemes with charges well above the 0.75 per cent auto-enrolment charge cap.

However, the board concludes value for money “is not solely determined by charges” and there is “no simple one size fits all” way to ensure savers get the best value possible.

It has shied away from recommending “industry-level actions” in favour of asking providers to review whether they justify high charges by 30 June 2015. The new independent governance committees should report back to pension providers on how best to secure members’ value for money by the end of December 2015.

The board also recommends the Department for Work and Pensions and the FCA jointly review the industry’s progress in addressing poor value schemes by the end of 2016.

The audit reviewed £67.5bn of assets under management from pre-2001 defined contribution schemes administered by Association of British Insurers members.

It found £42bn had charges less than 1 per cent with up to £26bn exposed to charges above 1 per cent. Of this, between £5.6bn and £8bn is potentially being charged above 2 per cent, while nearly £1bn is exposed to charges over 3 per cent.

Most savers being charged over 3 per cent had small pots of less than £10,000 and had stopped contributing. The board warns: “For such savers the impact of monthly fees can result in a very high impact of charges”.

In addition, about £3.4bn of assets have potential exit charges of 10 per cent if members leave the schemes before their agreed retirement date.

Independent Project Board chair Carol Sergeant says: “The challenge now is for providers and governance bodies to work together under the watchful eyes of the regulators to review our analysis and recommendations in the context of the schemes and savers they are responsible for, and bring about the necessary changes so that all savers who are not in automatic enrolment schemes can benefit from modern standards and outcomes.”

The ABI set up the board following the Office of Fair Trading’s 2013 report on defined contribution workplace schemes, which found about £30bn in old, high-charging structures potentially failing to give savers value for money.

The board included members from the FCA, NAPF, TPAS, DWP and the ABI.

ABI director of policy and deputy director general Huw Evans says:  “The Independent Project Board is right to recognise that no single charging structure provides the best value for all customers in all circumstances. How much people save and for how long can have an important impact on charge levels, and investment performance and quality of scheme governance also matter.

“Providers will welcome the clarity this report provides and will remain absolutely committed to building on the radical changes of the last decade which have already seen average pension charges fall to their lowest-ever levels for auto-enrolment schemes. This report will help providers do more to identify and tackle those workers who could be impacted by higher charges and ensure the right outcomes for them”.


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. Elephant in the room – high charges were due to the old style commissions and the inability of anyone (investor, provider, adviser and regulator) to clearly state that advice wasn’t free of charge, everyone was complicit.

    I have sympathy with providers who ran business models on these delusional assumptions, largely unchallenged that are now being faced with the same delusional thinking – that implies running a financial services company is cheap or even free.

    Nobody likes exit penalties or high charges, but it seems wrong to simply blame providers. A sense of shared responsibility needs to be achieved. We all know that it is far more costly to service old style arrangements by contemporary standards… just think of all those dreary, confusing with-profit statements .

    We are now in a very different time and it seems evident that the old large pension companies with huge legacy funds are struggling to remain relevant and face the prospect of gradually being swallowed alive or a slow lingering demise. It is only due to RDR (which many had to be dragged into) that we can from a position of “comfort” bemoan high charges. Let’s face it, the squabble over rebates, clean, super clean TERs, AMCs is all part of the same delusional twaddle and there remains considerable resistance within the fund management industry…. not to mention some of the FCAs findings on RDR thematic reviews. The changes in our industry are profound – like typewriter to ipad and some thoughtful responses will be required, it is not good enough to lazily judge the past by the present, otherwise we shall see a lot of beached whales and very easy pickings for those parasitic claims companies, who are now presumably on the scent thanks largely to the blunders of a certain Adamson.

    I’m sure the target practice will now commence.

  2. I agree with Dominic.

  3. Pressure was already building up and while the recent FCA fiasco made that organisation look ridiculous they were trying to address a very serious problem from the consumer’s perspective.
    The providers need to work with the FCA on this one and together they need to agree a way forward rather than have the FCA impose a solution that is forced through consumer and political pressure.
    Are the FCA sufficiently independent to resist this pressure?

  4. Anybody entering a contract with a large firm, are given a single option ‘take it or leave it’, there is no negotiation of terms and conditions. Firms were deemed by the Government to be abusing their power hence the Enterprise Act – Unfair Terms of Contract Provisions.

    An age related analysis would be more helpful, in determining who gets the benefits upon demise and
    when does it arrives.

    Mr Thomas’s contribution appears dated, but worth consideration.

    As to cheap and free 1986 introduce Regulation to contain abuse in the Financial Service Industry only a
    small population would dare to suggest it has been anything but a disaster. As they treated their career
    friends with generosity and great favour. Unfortunately for the industry they held their friends closest.

    Pensions have always been over complicated and exposed to corruption.

  5. Good to see Dominic kicking off with a well-balanced comments. Here’s my effort at heading-off target practice.

    Firstly, let’s be clear, I hate to see excessive charges applied. No-one likes to see companies profiteering, especially at the expense of the least wealthy. (Claims companies take note.) Nor do I think the industry beyond reproach, far from it.

    But let’s not hastily jump to the profiteering conclusion about the high charge/ exit fee cases, even though we’d not like to be trapped in one.

    Anyone who has run a business, as I have learnt the hard way, will know that the costs of distribution can easily form a large part overall costs. Costs that include time and money spent on all the potential customers who never sign up in the end. And the ones who do, but drop out early, for whatever reason, of which there are many. Costs that have to be priced in if you want to keep going. Costs that are rarely understood or appreciated and much less liked by customers or commentators from the sidelines. Especially those folk who have the luxury of a regular pay-check for work that just arrives….they don’t have to do the long, hard, sometimes soul-destroying and often disparaged part: making the sale. And yes, even top-quality bias-free client-centric advice includes the need to make a sale.. if only to go through the advice process in the first place. As the FCA would know if they really understood behavioural economics.
    Without incurring the sales costs, the end good of getting financial advice, having a pension pot, rainy day money, etc, would never have happened. Which we all know we need more of.
    So….very possibly, these small paid-up pots, are simply a natural consequence of what it took to get people investing in the first place, and fair reward to the people who worked hard to get at least some people to invest. The advisers needed to be paid. At a rate that keeps them in business, covering not just the cost of the actual sale, but a proportion of overheads, including pursuing non-secured customers. Like everyone else, being paid mostly at the time soon after doing the work is only fair. But as we know, most people don’t want and can’t afford to stump up immediately (or at all!) for that costly effort. By definition, these are people investing by regular payment, not lump sum. So, to pay the adviser, the only option for the product provider was to set charges and exit fees at a rate designed to recoup that payment over time, taking into account customer payments and investments keeping going for as long as originally expected…or not as expected.

    So let’s give the insurers chance to show the numbers before we decide where profiteering is or isn’t happening. Bearing in mind that before abuses made them dirty words, commission and cross-subsidies used to be a valuable mechanism for making financial products available to people who most needed them and wouldn’t otherwise have got them.

    Apologies to all for whom this is a long statement of the obvious, but it seems too much air time is given to those who should, but don’t get it.

  6. Good one Ruth!

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