Steve Watson takes a look at the debate on pension fund charges
The recent report from the Royal Society for the encouragement of Arts, Manufacturers and Commerce (RSA), combined with the headline grabbing comments from the leader of the opposition led to a difficult week of coverage for those with an interest in pension charges.
Many in the industry have dismissed the Labour leader's intervention as ill-informed scaremongering, but it is hard to disagree with the ABI view that emotive headlines and negative focus on charges run the risk of putting people off saving into a pension.
From the RSA report and associated coverage, the issues of transparency of charges and scale of charges come through quite clearly.
On the issue of transparency, it is a fair challenge to make and there is still potential for providers to improve in this area - a goal of access to straightforward, accurate and high quality information is one most people would support.
However, to have such a tight focus on the level of charges with the implied message that "lowest is best" risks missing out key parts of the overall picture for a DC pension saver.
Firstly and most obviously, not all savers are the same.Different risk profiles, different objectives and different stages of the saving for retirement journey will affect what strategies (and related charges) may be most appropriate.
Secondly, in the journey to secure the optimum income in retirement, the "at retirement" piece has the potential to undo all the good work put in during the accumulation phase and could render all efforts on reducing charges meaningless if it's not handled appropriately.
In the case of annuity purchase, as we are always reminded, it's a mistake you will live with for the rest of your life.
Get it wrong here and you probably don't care that your AMC was reduced by 0.25% a few years back because the saving has effectively been wiped out.
To take a simple example, if we look at an individual saving £200pcm for 20 years in a plan with a 0.5% AMC, they could receive an income from their provider at retirement of £3,135pa.
That same individual in a plan with a 1% AMC, who then shops around at retirement could receive an annual income of £3,444 (an extra £309 retirement income pa) despite the higher AMC.
Furthermore, that same individual who is fortunate enough to have both the lower AMC and the knowledge to shop around at retirement could secure an income of £3,626pa.
Less than half of people shop around at retirement. For those that do, in our experience income is increased on average by 22%, for those that don't a one-off opportunity is missed.
So, it is undoubtedly important to ensure savers are afforded value for money from their pension schemes. On the accumulation side, the key issues have been widely debated and many are now being dealt with in workplace pension reform.
This is only part of the picture and should not overshadow the importance of the decumulation decision.
Steve Watson is head of delivery - defined contribution pensions and benefits at Alexander Forbes Consultants and Actuaries
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