Numerous recent reports in the media have criticised pensions providers for being greedy, claiming that high charges are reducing the pension pots of hard-working Britons. Steve Herbert, head of benefits strategy at Jelf Employee Benefits, argues that most employer-supported schemes fall outside such criticism.
“British pensions are cut in half“, thundered a Daily Express front page earlier this month: “High charges and hidden fees are causing many pensions to be slashed in half… Greedy providers are blighting the plans of millions of savers who have worked hard and expect to receive a decent pension pot on retirement.”
There are costs associated with the running of pension schemes, and these can be expensive over the lifetime of the policy. However, it’s important to point out that, at least as far as employer-supported pensions are concerned, costs have been largely dropping over the past 10 years. This is, in no small measure, a direct result of the “stakeholder” pension legislation at the start of the last decade, and the drive of employee benefit consultants to force the pensions market to lower costs further.
The sensationalist story in the Express was loosely aligned to a paper issued by the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) entitled “Tomorrow’s Investor: Pensions for the People“, which focused on a number of areas regarding the state of UK pensions.
The RSA paper consistently refers to a management charge of 1.5%. Such charges often do exist within individual personal pension plans, but I feel I must highlight that most good-quality employer-sponsored schemes offer charges which are significantly lower than this figure. Indeed, it is quite common for schemes to be charged between 0.3 and 0.8% for active members, and that makes a very big difference to the cost for the employee over the lifetime of the contract. Indeed, the RSA paper actually confirms that a 1.5% charge would equate to a 40% drop in value over a policy lifetime, whereas a 0.5% charge would only be 12%.
It is not uncommon for the media to concentrate solely on the charges debate. Unfortunately, this focus implies that pension providers are “greedy”. It is generally accepted that pension providers typically make a loss in the establishment of most new personal pension schemes, and often only go on to make a profit if the plan remains with them for a significant number of years.
Additionally, many providers are not able to penalise any individual saver, or indeed an entire scheme, if a decision is made to remove funds in the early years. Put simply, this is a significant business risk for the provider. The UK remains a capitalist society, and as such providers need to balance risk against return, hence the healthy long-term profits which gloss over the short-term exposure for the provider.
I have a very real fear that the media approach to this issue only adds to the negativity which has attached itself, limpet-like, to pensions over the past few years. This really does not help the UK grapple with the true retirement time-bomb which is just over the horizon, which is actually what the RSA paper was really focusing on.
Having said this, I am not really convinced the RSA paper offers much new to the debate. The paper focuses on creating a simple investment philosophy and reducing the marketing and persistency costs of pensions overall. This is all very laudable, but the RSA may be missing the big picture here. The reality is that defined contribution pensions don’t sell themselves.
Left to their own devices, many employees fail to make the commitment to save, or don’t save enough. Even where a decision to save is made, there is often little active engagement in reviewing the level of savings and risk, or the impact of changed personal circumstances on their pension.
So what needs to be done? Auto-enrolment is clearly part of the answer, and it’s a relief that the coalition Government seems to support this. Compulsory employer contributions are essential to tackle the long-term problems, but current economic conditions and imminent austerity measures, suggest that an adequate, legally prescribed, level of employer contribution is still a very long way away. Simplicity in the pension savings system would also help boost saving.
It is clear that the UK is finally taking some tentative steps towards tackling these problems. But let’s not forget that advice, guidance and financial education are still key elements to the success of pension savings in the UK. I really hope that the current Government, and the industry in general, continue to appreciate the value of these services, as a failure to do so could worsen, rather than improve, the pension savings gap.
While the debate continues, I would urge readers to remember that pensions are a much more complex subject than a simple debate around charges, and also to treat tabloid headlines with a healthy pinch of salt.