New FCA study reveals hundreds of thousands of older pensions being charged huge fees.
The Financial Conduct Authority (FCA) has exposed the high annual charges implemented by some pension fund managers, which in some cases equal more than 3% of the value of a pension fund.
These findings are specific to workplace defined contribution (DC) or money purchase pensions, where both an employee and their employer pay in a contribution to the fund every month. These are managed by a pension provider selected by your employer. The money is then invested on your behalf, and the provider charges an annual percentage of the pension pot as its fee.
Office of Fair Trading market study
The Office of Fair Trading (defunct as of April this year) undertook a market study into workplace pensions in 2013, and reported that competition alone was not enough to provide reliable value for money for pension savers, identifying £30 billion in schemes with charges “at risk” of providing poor value.
It identified a particular “lack of competitive pressure” amongst charges levied on older schemes, and a risk pension providers were using their market share to keep annual charges higher than necessary.
The complexity of the pensions themselves and, in some cases, the complexity of the charges also mean that it is difficult to tell exactly how much value for money is being delivered – and employers may “lack the capability or incentive to assess value for money” on behalf of their employees, the OFT said.
This new FCA investigation directly follows on from the OFT’s study.
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What does the FCA say?
The FCA examined £67.5 billion of funds being managed, and says that £42 billion is exposed to charges of less than 1% of the total pot, even when faced with a ‘worst case’ scenario.
The table below shows the estimates of the total value of funds and the potential charges each of those categories faces.
|
Fund value |
Potential charges faced |
|
Up to £25.8 billion |
> 1% |
|
Up to £13.4 billion |
> 1.5% |
|
Up to £8 billion |
> 2% |
|
Up to £900 million |
> 3% |
While the FCA research focuses on so-called ‘legacy’ schemes, set up before 2001, £12.4 billion of the segment being charged over 1% is held in schemes that were set up after 2001.
As you can see, up to £900 million of pension funds held in defined contribution schemes could be facing massive charges of over 3%. The charges in the table are expressed as a total of the pot, but in reality may constitute a series of separate, smaller charges that add up to a high total.
[SPOTLIGHT]The FCA says it found 38 different types of charges levied against pensions, and 291 different combinations of charges set against savings, which illustrates the complexity of choosing which scheme to go with, and therefore also the difficulty of selecting one which offers good value for money.
What’s the current situation?
In March 2014, the Department for Work and Pensions (DWP) proposed improvements to the way in which DC workplace schemes were managed, including a cap on charges which will come into force in April 2015.
This will be set at 0.75% of funds, and will apply to all charges set by the firm managing the pension, although it excludes transaction costs, which can be passed on to savers in the form of charges.
However, the cap will only apply to auto-enrolment pension schemes, and only when a person is happy to use the ‘default’ option offered by their company. The DWP says that “it is likely that the vast majority of individuals” who are automatically enrolled will end up in the default category. But those who want to take a more active role in managing their pension – or opt out of auto-enrolment altogether – could still be hit with higher fees.
And members of older schemes that are not auto-enrolled, as well as scheme members who are no longer contributing to a pension, will also not benefit from the cap. Members of qualifying schemes need to actively contribute to their pension at least once after 6th April 2015 for the cap to apply.
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Why would you stop contributing?
People may no longer be contributing to a specific fund because they have changed jobs and haven’t moved the ‘old’ fund elsewhere, or opted out of auto-enrolment following a decision, for instance, to manage their own pot in a personal pension.
These savers were the focus of the FCA’s audit, as its findings indicate that high charges are potentially being levied against pensions that don’t fall within the categories to be protected by the cap.
This is a relevant point of focus, because the majority of the money impacted by the very highest charges of more than 3% is held by savers with pots of less than £10,000. Over 90% of those pots are held by paid-up savers and savers who have stopped contributing to those pots.
The FCA estimates 407,000 savers may have joined pension schemes within the last three years that may expose their savings to 1% charges.Meanwhile, up to 178,000 could face charges of greater than 2%, and 22,000 greater than 3%.
What is the FCA asking for?
The FCA has written to the provider of each scheme examined where savers face the prospect of high charges, or where exit fees are applied. It has asked them to review their data and identify ways in which the outcomes for savers could be improved, and actions to take to prevent new savers joining poor value schemes. It also says it requires justification for any high charges set by firms.
It has asked that responses be submitted by the end of June 2015 at the latest.
Providers’ recommendations will then be evaluated and a course of action suggested that will be most effective to ensure future value for money for savers. Plans should be agreed upon and put in place by the end of December 2015.
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