Which? and members of the pension and investment fund industry have called for a new Code of Conduct on the charges made on workplace pensions to help employers choose the best pension for their staff.
The National Association of Pension Funds (NAPF) has launched a consultation to discuss how the pension industry can make it easier for employers to understand pension charges and the services offered by defined contribution (DC) pension providers, in relation to how much they are charged.
The purpose of the Code of Conduct is to:
- Make sure that all charges are clearly and accurately stated to employers when choosing a pension scheme
- Ensure that charges are presented in a standard format so that employers can compare the effect of charges on pension pots
- Ensure that services are presented in a way that allows employers to compare what they are getting from a provider
The Code is a welcome development, given that advice provided to employers about which pension scheme to automatically enrol their employees into is unregulated.
The effect of charges on your pension pot
The working group, including the NAPF and Which? believe that a new code of transparency can help consumers regain trust in pensions and saving for retirement. Many feel that the current negativity is a result of the opaque nature of charges.
Charges can have a big impact on your returns. If you were to save £100 a month into a pension scheme charging 1% a year over 40 years, with your money growing by 5% annually, you’d have just over £115,000 in your pension pot.
Increase that annual charge to 1.5%, and you would lose out on around £13,000 from your final pension. If charges increased to 2%, a further £10,000 would be lost.
One member of the working group that has devised the new Code of Conduct, has called charges across pensions ‘horrendously complicated.’
Pensions must be good value for money
Executive director of Which? Richard Lloyd said: ‘All automatic enrolment pension schemes must offer good value for money. It is important that employers can compare like with like and be able to easily identify the best value scheme for their employees.
‘Alongside greater transparency, we want clearly defined minimum standards to protect consumers from being automatically enrolled into poor value schemes. Current regulation requires contract-based defined contribution pension schemes to offer information to members about charges, but the same requirements do not apply at the point employers pick pension schemes for their employers.’
Transparent trading costs
The consultation argues that there is an urgent need for greater transparency around trading costs – the fees that managers of pension funds incur when buying and selling shares. In their current form, it’s very difficult for both employers and pension savers to discern how these costs affect pension performance.
Which? has been calling for more transparency on trading costs since October 2011. We urge the industry to make ALL charges clear to consumers and find a consistent method of presenting them in a way that is clear and understandable.