The oft-maligned stakeholder pensions are responsible for reducing pension charges and improving the clarity and transparency of charges.
Transparency of charges can only be a good thing. It is one benefit, I believe, of the introduction, 10 years ago, of stakeholder pensions.
With the impending arrival of auto-enrolment, savers will require more information than ever before. To avoid high opt-out rates and optimise commitment to schemes, savers need to know where their money is going.
SHPs brought with them standardised charging structures. The annual management charge is the only charge associated with SHPs. There are no additional charges or embedded charges.
Since SHPs were introduced, we have seen AMCs fall from about five per cent prior to their introduction to about 0.5 per cent, with very few more than 1 per cent.
This is a huge improvement for savers. Not only are they paying lower charges, but they know exactly how much of the money is going towards their retirement and how much they are paying the scheme administrator. They can also easily compare the costs of competing schemes and make informed decisions about where to put their money.
The Government’s own national employment savings trust pension scheme, which will be introduced next year, does not follow this simple, clear and transparent charging model.
While Nest will operate with an AMC of just 0.3 per cent, there is an additional initial charge of 1.8 per cent. Of course, Nest needs to recoup its start-up costs, which will not be insubstantial. But their target market is primarily those new to pension saving.
This group of savers is likely to have the least experience to draw on when it comes to providing for their retirement. Since these savers are going to be auto-enrolled into pension schemes, we can’t assume that any of them will look too closely at the small print of their pension scheme.
In many cases, savers may find it difficult to figure out whether they are better off paying an initial charge of 1.8 per cent with a 0.3 per cent AMC or simply going for a scheme with a 0.5 per cent AMC. Clarity of charges should mean the exact opposite. Factor in that people are moving away from retirement at a specific date to flexibility based on the size of their pension fund and their ability to work, perhaps on a part-time basis, and it makes those sums incredibly difficult.
It is essential to engage this group from the outset. Saving when young for the long term is much more effective than trying to save more, later. Engagement is, possibly, the biggest challenge facing the Government.
Any recommendation by The Pensions Regulator to encourage clarity and transparency of charges is to be applauded.
John Jory is director general of the Centre for Retirement Reform, a non-executive director of a contract-based workplace defined-contribution scheme and a trustee of a defined-benefit scheme