Five entirely depressing findings from the DC charges audit

The Independent Project Board, set up to dig deeper into an area analysed last year by the Office of Fair Trading, looked at workplace pensions sold pre-2001 – or those sold since that have charges of more than 1 per cent, or more than one type of charge.

This amounts to £56.9bn in contract-based schemes and £10.6bn in bundled trust-based schemes, which is almost two-thirds of the UK defined contribution market. Using a 'reduction in yield' measure – which contains all costs paid except transaction costs – the board found a depressing picture.

The nation has £26bn of savings in poor-value schemes

And it could be more, depending where you draw the line. Some saw the government's 0.75 per cent charge cap for pension schemes used for auto-enrolment as too high, arguing it should have been 0.5 per cent. 

Regardless, 1 per cent is not the value level set by the government – now, how much of this legacy DC scheme market would be above that measure?… 

...within that, £13.4bn is paying double the government's capped level

The figures are further broken down, demonstrating how many DC savers are handing over chunks of their retirement pots to providers.

• There is £13.4bn of savings potentially paying a RIY above 1.5 per cent

• There is as much as £8bn paying more than 2 per cent

• Within that, some £900m of the DC savings market may be paying more than 3 per cent

The most expensive schemes are likely to have complex charge structures, with deductions from contributions or monthly fees. Some schemes also have tiered charge structures.

Those with smaller pots are bearing the brunt

The majority of those with more than 3 per cent have pots of less than £10,000. Nine in 10 of these savers have stopped contributing, meaning that monthly charges start to stack up.

A worrying picture emerges for those schemes with weaker governance structures, where members are least likely to be engaged with what is going on. 

Exit charges at 10% could hit £3.4bn worth of savers

This figure is especially pertinent for the £800m held by those aged over 55 who will be able to take all of their savings as cash from April next year, but is also relevant to all scheme members.

Expect the debate on these charges to reignite next year, and last well into 2016, when the government's plans for pension pots to follow people from workplace to workplace come into play.

Governance is the answer (really?)

The board's creation of guidance targeted at governance bodies is, of course, welcome:

Such key questions include whether the provider has taken any action since April 2014 to reduce charges for existing savers in the scheme, and to benchmark (see p65 of the report).

And its recommendations for providers, each of whom above the 1 per cent level have been written to by the board, are sensible:

Any recommendation that starts with, "There is no simple, 'one size fits all' charge structure that will ensure that all savers get value for money all of the time," is hardly going to preface a strong line.

When charges are reaching the 3 per cent mark, value does equate to cost.

What the 0.75 per cent cap has demonstrated is that decent strategies can be worked below that point, and that a cap was not, as predicted, the end of the world – so far at least.

The IPB does not have the power to force providers to amend their structures. The government does.

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