Out-Law / Your Daily Need-To-Know

Legacy pension schemes must have plans in place for removal of any high charges by end of 2015, according to review

Out-Law News | 19 Dec 2014 | 4:20 pm | 3 min. read

A significant percentage of those saving into older defined contribution (DC) workplace pension schemes are paying annual fees of as much as 3% of the value of their assets under management (AUM), according to the authors of an independent report into so-called 'legacy' scheme charges.

The Independent Projects Board (IPB) will now write to the providers of those schemes in which savers are potentially exposed to high charges requesting that they come up with a plan to address those charges along with new independent governance committees (IGC). Once agreed, providers and governance bodies will need an implementation plan in place by the end of December 2015 at the latest, the IPB said.

The report also recommended that the government and the Financial Conduct Authority (FCA) conduct a further joint review, to report by the end of 2016, covering industry-wide progress on the IPB's recommendations.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that the IPB's conclusion is broadly as expected and helps industry to overcome system and contract restrictions in order to get contract-based schemes in better shape.

"The legacy audit relates to £67.5 billion worth of assets under management, so the findings of the Independent Project Board are hugely significant for savers and providers alike," he said.

"This highlights in turn the significant role to be played by the new IGCs and will test the effectiveness of terms of reference; disclosure and confidentiality arrangements with the provider; and the value for money assessment methodology," he said. "The challenge for providers and IGCs will be to get to grips with these operational issues during a period of intense activity in 2015."

From April, providers of contract-based schemes will be required to operate IGCs to assess the value for money delivered by these schemes and report on how they meet new quality standards for DC schemes set by the Pensions Regulator. Trustees of trust-based schemes will also be required to consider and report against the quality standards.

The IPB was set up by the Association of British Insurers (ABI) and its member firms following a critical report by then consumer protection watchdog, the Office of Fair Trading (OFT), in September 2013. One of the outcomes of the report was that all schemes with an AMC above 1% would be audited. Charges on DC schemes used for automatic enrolment are to be capped at 0.75% from April next year; however, this will not extend to older schemes.

DC pensions are those where the benefits provided on retirement depend on the performance of the saver's investment. The OFT concluded that some members of these schemes were not getting value for money from their pensions in its 2013 report. In particular, it found that members of older, high charging contract and bundled trust schemes were paying an AMC on average 26% higher than those in newer schemes.

During the year-long audit process, the IPB collected data on charges and benefits relating to schemes with a combined AUM of £67.5 billion. It found that £42bn worth of pension savings had charges of less than 1% of AUM annually in all scenarios, but that between £23.2bn and £25.8bn of AUM was potentially exposed to charges above 1%. Around half of this was potentially exposed to charges above 1.5%, while around £900 million was potentially exposed to charges above 3%, it said.

The IPB found that those schemes in which savers were potentially exposed to the very highest charges were more likely to feature complex charging structures, monthly fees or deductions from contributions. It was particularly concerned that most of the AUM exposed to charges over 3% was held by savers with small pots valued at less than £10,000, and that much of this was held by savers that were no longer contributing into the scheme.

Steve Webb, the pensions minister, told the Telegraph that he was planning to speak to pension providers about their charging structures in the new year. However, he has ruled out a blanket ban on all high charges as he said some of those schemes delivered guarantees that justified the higher costs.

"I am now saying to the industry, I am going to get them all in, I am going to talk to them all one by one in the new year and challenge them to come up with big, bold solutions," he told the newspaper. "If I find that half a dozen big companies are willing to do something big and bold and a few aren't, I will have no hesitation in naming and shaming them."