Obscure fees could be eroding your pension – here’s what you should be paying
If you’ve ever endeavoured to compare fees charged by pension providers, you’re probably sat wild-eyed, rocking yourself back and forth.
Despite the push to rid the financial sector of opaque and confusing charging structures, it’s still incredibly difficult for consumers to compare the fees levied by pension providers.
Not only can it be difficult to find fee information, but charging structures can vary dramatically, making it hard to compare like-for-like. While most providers simply levy a flat percentage of the pension fund on an annual basis, others have a monthly admin fee – sometimes in pounds rather than a percentage – in addition to the annual management charge (AMC), and some providers like Nest levy a charge on all contributions on top of an annual fee.
It gets even more complicated with workplace pension schemes, where the fees will depend on factors such as the number of employees joining the scheme, the level of funds under management, and the investment choices made by the employer.
It’s no wonder that the vast majority of people just sigh and get on with it, potentially allowing their pension pots to be eroded by unnecessarily high fees.
As clear as mud
While the difference of a percentage point might not sound like a lot, in reality these charges can make tens of thousands of pounds of difference to your savings.
For example, figures from The Lang Cat show that an investment worth £100,000 with an annual return of six per cent and a fee of one per cent will grow to £432,194 after 30 years, while a fee of two per cent would leave you with £324,340 over the same period. You would essentially take a cut of £107,000 (or 25 per cent) if you remained with the fund charging the higher fees.
Now consider that PensionBee told us that it still sees AMCs of up to five per cent for some private pensions.
When Morning Wire looked at the recent Independent Governance Committee (IGC) reports published by some of the UK’s largest pension providers, many had either already imposed one per cent annual fee caps across their fund options or at least intended to. Others simply said that they are frequently reviewing their charges to make sure that they are in line with objectives.
Broadly speaking, fees do appear to have fallen over the years, largely driven by the 0.75 per cent fee cap on default funds in workplace pension schemes, which came into force in April 2015.
It’s a competitive market, so many providers are lowering their fees further – for example, average annual fees for workplace pension schemes offered by Aviva, Scottish Widows, and Royal London are between 0.45 and 0.5 per cent. This compares favourably with the Department for Work and Pensions’ national average of 0.54 per cent.
But even though this 0.75 per cent threshold sounds relatively simple, you start getting into murky water when you find out some providers charge more for “older” default funds – that is, those funds that were launched before the cap was introduced.
Indeed, while Scottish Widows charges an average of 0.48 per cent for its “modern” default funds, this jumps to an average of 0.87 per cent for its “older” default funds, according to its latest IGC report.
The Financial Conduct Authority (FCA) told Morning Wire that policyholders have to expressly agree to remain in the original fund under the higher charges. If they don’t, consumers would have to be moved to a default fund with a 0.75 per cent charging structure.
But this isn’t the only troubling issue. Even if you’re an existing customer, you could still find it difficult to determine how much you are paying a company to manage your investment.
In fact, Morning Wire found that one of the UK’s biggest pension providers, Scottish Widows, doesn’t present its fee information online to all of its customers, meaning that in some cases, those who are invested in their older funds have to call up and ask what they are paying.
When asked to respond, a spokesperson for Scottish Widows said: “Many of our pension schemes have bespoke charging structures which makes it difficult to display accurate information in a meaningful way for each and every customer within their statement. We are, however, constantly looking at and investing in our technology to help us to do this, and are working on including this type of information in future statements.
“In the meantime, the best way for us to support our customers with regards to understanding their charges is for them to speak directly to one of our customer service advisers, at which point we will be more than happy to explain the charges relating to a specific policy.”
This is just one example. However, it’s worrying that this is even an issue given that investment charges have been in the regulatory spotlight over recent years. The FCA is currently reviewing how companies disclose costs to workplace pension scheme members.
Meanwhile, last month, the Pension Charges Bill, which calls for greater transparency and an extension of the 0.75 per cent cap to all defined contribution pension schemes, was granted a second reading in the House of Commons.
When asked if this was the right answer to the fee conundrum, former pensions minister and director of policy at Royal London, Steve Webb, argued that a blanket cap may not be the best solution. He points out that some pensions and drawdown accounts are likely to be tailored to individual needs, and therefore could justify a slightly higher fee.
“However, those who wish to charge more need to be clear about what they are charging, and demonstrate what additional benefit they are delivering to consumers,” he says. “The era of hidden or obscure charges should be brought to an end as soon as possible.”
And it’s not just the AMC and admin fees that you could be wary of. If you want to move to a better value provider, you could be asked to foot an expensive exit fee too.
While Romi Savova, chief executive of PensionBee, says exit fees are present in just four per cent of all pensions, she warns that these charges can be large, and particularly detrimental to people with smaller pension pots or those who are nearing retirement. Savova argues that exit fees should be banned: “We believe that these charges undermine consumer confidence in the pensions industry, and deter people from switching when it may be in their best interests to do so.”
Charging ahead
So what should you expect to pay?
Unless providers can justify the extra cost to their customers and provide a higher level of service or performance, Savova says you shouldn’t be charged more than one per cent overall.
“The industry has made some progress on fee transparency, but more work needs to be undertaken to present charges in a comparable manner in percentage and pounds,” she says.
“Overall, we still find that many consumers are not aware that their pensions have fees. And until we can raise awareness of pension fees, we will struggle to create a competitive market from a consumer standpoint.”
Joe Dabrowski from the Pensions and Lifetime Savings Association notes that action is being taken to improve transparency, pointing to last month’s launch of the Cost Transparency Initiative, which aims to standardise cost reporting across the industry.
Experts often advise that if you can’t easily find or estimate the fees, avoid investing your money with that company.
And if customers will start moving away from companies which aren’t transparent, perhaps the pensions industry will finally get its act together by making their fees clear. It’s either that or we wait for the regulator to throw the rulebook at them.