Why pounds-and-pence charges are not enough

Using simple monetary values for charges incurred by members would certainly improve transparency and understanding, but there is still plenty more that can be done – particularly around the size of those charges themselves.

With the launch of auto-enrolment, and many people joining a UK pension scheme for the first time, the government is clearly feeling this responsibility, with the pensions minister talking about giving people confidence they will get value for money.

In fact, ministers have already announced that they would pass laws to allow them to cap pension fees from this autumn. In the defined contribution-equivalent 401k market in the US, this has already happened, and a fee disclosure requirement has recently been introduced.

The logic is obvious. In fact the US government's Department of Labor’s website gives the example of a member with a current 401k account balance of $25,000, invested for 35 years.

The difference between two portfolios with assumed identical performance, but one with a 0.5 per cent fee and the other a 1.5 per cent fee, is a reduction in the member’s account balance at retirement of a staggering 28 per cent.

What members need to know

So, it's clear that both lower fees and transparency are important and expressing charges to members in pounds and pence would aid member understanding? Well, yes and no.

Increased understanding should lead to improved member outcomes, but we must beware that the issue of charges doesn’t become a ‘three card trick’.

A DC member’s outcome at retirement is affected by a number of factors:

1. The level of contribution to their plan.

2. The returns achieved on their investments.

3. The cost of buying an annuity when they choose to convert their pot into a pension.

For example, a member paying higher charges for a fund with a better performance may still get a better outcome.

In the US example , if that same member got a real return that was 0.5 per cent higher, after taking into account the higher fee level, they would typically get an increase in their balance at retirement of 19 per cent.

Member understanding should be our highest priority

Therefore, there is obviously a need for members to understand all the potential factors that will affect their potential pension outcome.

Operating a DC future, and essentially putting the responsibility for pension outcomes into the hands of the member is a huge risk, both for the individual and for the future of the UK economy.

We need to educate all DC members (and as a result of auto-enrolment, read: most people employed in the UK) so that the decisions they make with their pensions give them the best possible chance of a good pension outcome.

Unfortunately, schemes and the wider industry will find it hard to forget what we already know, and remember what others do not know.

We need to do that and quickly. The industry knows that a picture is worth a thousand words, but we will insist on using those thousand words, and wrapping them up with pension terminology for good measure.

UK schemes must ensure that when the monetary value of charges is delivered to members, it is done in a way that is consistent to enable comparison, and does not involve a 40-page document, only accessible to the most determined reader.

We have a responsibility to allow members to explore the relationship between the level of charges, the level of contributions, the returns achieved on investments and the cost of buying an annuity to their eventual pension outcome.

We need to provide them with tools to do this – not just the thousand words, but tools that allow them to explore the possibilities – and increase their understanding.

Member understanding should be our highest priority and that should include total transparency about charges.

Expressing member charges in pounds and pence will certainly be a key step in the right direction, although it will not change member outcomes on its own.

Karen Partridge is chief business development officer at communication consultancy AHC