The day-to-day cost of administering your pension is currently paid for by Which?.
Prudential Investment Charges and Costs
The money in your Money Purchase Account and your Prudential AVC Account (if you have one) is invested in the Prudential With-Profits Fund.
The costs of running the With-profits Fund incurred by the Prudential are deducted and what is left over (the profit) is then available to be paid to you and all the other investors. You get your share of the profits in the form of bonuses set by Prudential and added to your Account.
Prudential report that the investment management charge that they assume will be paid by members when they set the bonuses on their With-profits Fund is about 1% pa. This charge is not guaranteed.
Prudential also report that the With-profits Fund pays transaction costs of 0.05% per year. The transaction costs are in addition to the investment management charge paid by members. There are no explicit charges made on investment of contributions.
Hence your investment return is reduced by the management charge and transaction costs, which are allowed for and reflected in the annual bonus declaration.
If the money in a member’s Money Purchase Account is withdrawn at any time except on death or on the normal retirement date, Prudential are at liberty to reduce the amount paid out to reflect the current market value of the underlying investments.
This is known as a Market Value Reduction (MVR). No MVRs were applied to members’ funds in the Scheme year ending 31 March 2019.
Value for Members Assessment
The Trustees are satisfied that the Hybrid Section of the Scheme is priced competitively.
Each year the Trustees carry out an assessment of the extent to which charges and transaction costs borne by the Scheme’s members represent good value for the services that members receive.
It is widely accepted that value for members is difficult to assess and while there is guidance on suggested items to cover there is no prescribed method for assessment. The Trustees’ conclusion is based on the following considerations.
Members entitled to benefits from the Hybrid Section will receive either (i) a Final Salary Pension based on pensionable service and salary at the date they left the Scheme, or (ii) a Money Purchase Pension that can be provided from a Money Purchase Account that builds up from part of the employer and employee contributions, and is invested in Prudential’s With-profits Fund.
Members do not pay directly for the administration or investment services that are used to deliver the benefits.
The administration charges and transaction costs levied by Prudential are expected to provide value for members as their minimum benefit is at least the value of their defined benefit arrangement (the Final Salary Pension), while they benefit from a potentially higher retirement income from a higher level of annuity (the Money Purchase Pension).
It is unlikely for a similar arrangement - or one that provides better value - to be negotiated with another provider at a lower fee level.
Prudential is differentiated amongst large insurance providers by its continued, active support of with-profits investments and the fund is highly rated by AKG Financial Analytics, who are the leading independent assessor of with-profits funds.
Prudential Additional Voluntary Contributions
The Trustees consider that Prudential AVC options offer value for those members seeking the guarantees offered by the With-Profits plan for the reasons outlined above.
Legal & General Additional Voluntary Contributions
The Trustees assessment of value for members in the DC Section also applies to members in the Hybrid Section with AVCs in the Scheme’s lifestyle investment strategy.
The Trustees assess Legal & General’s Ethical UK Equity Index Fund as providing value for members for the same reasons.
Equitable Life and Clerical Medical Additional Voluntary Contributions
The Trustees lost confidence in Equitable Life following the difficulties they faced when they closed to new business in December 2000.
The Trustees also lost confidence in Clerical Medical as investment managers following a period of poor performance and, as the stewards of members’ money, they closed the Clerical Medical AVC options to future contributions with effect from 31st March 2007.
The Trustees do not consider that Equitable Life or Clerical Medical AVC options offer value for members.
If you are a member who holds an AVC with either Equitable Life or Clerical Medical, you are encouraged to review their suitability and you may transfer these assets free of charge into an alternative fund with Legal & General if you wish.
To find out more about the Value for Members Assessment, see the Annual Chair’s Statement.