Let’s say you’re buying ketchup. When the label on the supermarket shelf shows you the ‘price-per-kilo’, alongside the price of each bottle, that’s helpful. The bottles are all different sizes, brands and even flavours, but you can see at a glance how much you’re getting for your money and use this to make a decision about what to buy.
Pensions are not like ketchup. Comparing providers is more complicated than just a ‘price-per-kilo’ style charge. People understand, for example, organic ketchup will cost more per kilo. There is assumed knowledge and experience about the limited variation in the field of ketchups. With pensions, we shouldn’t assume knowledge, and the range of variation is larger, although not always next to each on a shelf for a handy comparison.
Keeping members engaged depends, in part, on how you charge. It’s got to make sense, seem fair and be easily understood. But the DWP’s recent consultation on charges for DC pensions, including a universal charging structure, may have a damaging effect. Some of the proposals could lead to complicated messaging and administration processes. Both raise risks of errors and could knock member confidence and outcomes. Crucially they may lead to members missing out on asset classes which would drive a better benefit for them.
Charges alone don’t give members the full picture
To really understand costs and charges, members need to understand the quality of service, range of options and, importantly, net investment returns. Without appreciating how important those factors are, a member could move to a scheme which gives them a poorer outcome in the long-term. Good administration is the underpin of good member service. A scheme which can engage or even inspire members is better placed to help them to a richer outcome, based on good, consistent administrative delivery and net investment returns.
Members don’t choose a scheme based on the level of charges
Members don’t choose a scheme at all. Their employer chooses the scheme and members are automatically enrolled. The most significant decisions for members are whether to opt out and whether to transfer deferred pots to their new active pot. Comparing charging structures is less important than a member comparing their contribution to what ends up in their pot, with the employer’s contribution, tax relief and net investment returns.
Understanding charges is not the main obstacle to member engagement
When a member asks, ‘what will this cost me?’ they don’t tend to mean what charges are they paying. They’re talking about the amount which goes out of their pay and into their pension.
In the world of auto-enrolment (AE), membership (as opposed to member engagement) is driven by a member’s capacity to save, along with incentives and the levels of contributions invested on their behalf. We draw the distinction here between ‘membership’ and ‘member engagement’ recognising many members of pensions schemes are not really engaged, they are just members by virtue of the default AE process and probably an underlying view they should do something about a pension.
A standard charging structure won’t help members make good decisions about their pensions. It won’t necessarily make comparison easier, and it won’t help members understand value for money. Good systems to support the member journey and the engagement model will.
Other government initiatives could help here, like simple, standard annual statements and pensions dashboards. Only when initiatives like these make pensions provision clearer will the member have a helpful context in which to compare charges. PASA is working to provide guidance for delivery of the dashboard to the industry and the backbone will again be the administration delivery and data management.
As these things play out, look out for further guidance from the Master Trust Working Group on how to implement best practice.