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DC Issue 3: Are you getting value for money?

DC Issue 3: Are you getting value for money?

PS Aspire, Trends in the DC Market Survey Results: Helping to illustrate organisations’ DC pension offerings and their attitudes towards, and methods of, employee engagement.

 

Below are some basic considerations within DC retirement plans, all of which are equally significant, to both employers and employees.

 

1.       Contributions

2.       Member support

3.       Value for money

 

In our final issue, following our previous issues on contributions and member support, we will now focus on the importance of getting value for your money.

 

Value for money

Once members are better engaged and are contributing a specific amount into their pension pot, their employers will want better value for money. This will typically be in the form of a lower annual management charge (“AMC”) for their pension funds. This has already been helped by the 0.75% DC charge cap for a default fund of a qualifying workplace pension in addition to increased competition between pension providers, governance and oversight of pension arrangements by employers and their advisers and the ending of commission payments to pension advisers.  But, do employees, for the most part, actually know what their scheme fees are?

 

Figure 1 illustrates that nearly 17% of respondents are not actually aware of the AMC for their organisation’s pension arrangement, which is problematic given the recent focus on this area by the Government. Just over half of respondents have an AMC below 0.5%. Although some smaller employers operate schemes with an AMC below 0.5%, the vast majority of such respondents have at least 250 employees.

 

The few schemes with an AMC above 0.75% are operated by employers with a smaller workforce who may not yet have reached their automatic enrolment staging date and therefore do not yet need to comply with the charge cap.

 

Figure 1 AMC of the default fund for pension arrangement

 

In addition to an AMC, the final DC fee also takes into account the charges of a pension adviser. What is important in this instance is what their fees are being based on. This is significant because employers that still rely on commission to fund all or part of the consultancy services, which is at 16%, will need to address this as commission payments will soon be banned from April 2016. From this date, employers will need to work more closely with these advisers on the scope of services required and the associated fees.

 

Figure 2 Basis of pension adviser’s remuneration

 

Conclusion

We can expect contribution levels to DC pensions will continue to evolve, not least because of the expected automatic enrolment minimum contribution increases required by April 2018 and April 2019. Contribution increases are essential if the Government is to make further progress with its aim of increasing individual responsibility for retirement saving and reducing the burden on the State.

 

The current typical levels of employee contribution highlighted by this survey, in the range 0%–5% of pensionable earnings, will be insufficient to enable pension members to retire comfortably unless they happen to be one of the fortunate few working for a generously contributing employer.

 

Employers can help by informing and educating their workforces, a factor considered significant by employers, according to our survey, in helping employees plan for retirement and providing support services to improve their understanding of pensions and retirement.

 

We expect the communication role of employers to develop further and indeed some employers, particularly the larger ones, are now taking steps to support employees of all ages with guidance on a wide range of financial matters.

 

Read the full report, PS Aspire, Trends in the DC Market Survey Results, here.

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