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Transparency of charges is the key to pension success

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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

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Transparency – Sunlight is always the best disinfectant

  2. Julian Stevens 27th July 2011 at 9:42 am

    It’s all very well to talk about the benefits of engaging people new to retirement saving, but if they can’t or won’t pay for the adviser’s time and expertise and if there’s no margin for these costs built into the scheme itself, then it’s difficult to see why practitioners will want to get in any way involved. We aren’t charities, we aren’t funded by government or by local authorities or by compulsory levies. Like it or not, the majority of IFA’s operate transactional business models and only a very small proportion of the public are prepared to pay fees for pure advice as opposed to advice on the suitability for their needs and objectives of a packaged product. CAR may well put a stop to overcharging, but providing advice on a fee basis in respect of a government designed scheme about which most of us (I suspect) have rather less than entirely positive views isn’t an area into which most of us are interested in moving. I know I’m not.

    NEST completely overlooks not just most but ALL the aspects of the current pensions framework that are very definitely in need of fixing, yet to which both the last government and the current one have simply turned a blind eye. Given that all these things could be fixed at little if any cost to government, there really is no excuse for ignoring them and instead all but forcing people to participate in a scheme that most employers and employees can ill-afford. The administration is to be done by a firm in India (and don’t we just love Indian call centres?), the investment is to be managed by a firm in the USA of which most people here have never heard and the choice of funds is iffy at best (mostly index trackers and gilts ~ whoopee!).

    So much for the Conservative party’s promises prior to the election “to reignite the UK’s savings culture” and to stimulate the UK’s private sector. Sure, people need to be saving more towards financial independence in retirement. I just see NEST as entirely the wrong way of getting them to do so. And anyway, there are already plenty of private sector pension plans with transparent charges, so NEST brings nothing new to the party on that front.

    What will the government do if opt-outs from NEST turn out to be as high as many people are predicting? Probably blame it on the messengers rather than admit that it hasn’t actually been a very good idea. Transparency of charges is NOT the key to pension success and anyone who thinks so is deluding themselves and trying to delude others.

  3. wipe the rabid foam off, people just want to know that they are in a decent pension that they can save in, nest probably a pish idea but lets try it, if people actually want to get involved in their future let them get advice, there should be a campaign from the goverment to say we are not footing the bill for your retirement any more, if you dont save some money you will die alone in poverty – maybe people will wake up and take responsibility

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