A lack of engagement on pensions, poor scheme governance, and having multiple pensions pots may have as detrimental effect on retirement outcomes as high and opaque charging structures, according to a new report from the Pensions Policy Institute.
This PPI report — commissioned by workplace pension provider Smart Pension — reiterated that low costs and transparent charges remain important. But it pointed out that there are now “only small differences between different charging structures that meet the Government’s charge cap”.
As a result the PPI said there is a need for “common framework” to help savers have a better understanding of the overall value for money each scheme offer, rather than solely focus on the headline costs.
The PPI’s senior policy research Mark Baker says: “Charging structures and levels do have an important role to play in determining savers’ retirement outcomes, but they should be understood alongside a number of other factors, such as contribution levels, investment strategies, the impact of accumulating multiple pots, the strength of governance oversight and member communications and experience.”
“A charging structure that appears to offer a low cost for savers does not necessarily guarantee good value, as other factors, particularly investment performance, increased personal contributions and member engagement will affect outcomes.”
He points out that automatic enrolment has two features that can work against savers achieving “optimal outcomes”.
He says: “The first is that members do not have always influence over the scheme their employer elects to enrol them into, and the second is that they are likely to approach retirement with multiple pension pots accrued across different employers and schemes.”
The report found that savers with multiple pots often have poorer retirement outcomes, when compared to those who have saved into a single scheme throughout their working lives, or who have consolidated pensions when they changed employers.
The PPI said the amount they lose will depend on the nature of the charges they face across their different pension schemes. It also remains the case that those with multiple pots may be less engaged with these savings.
The report also points out that the costs incurred in running a pension scheme are complex, and not all fall within the remit of the cap. Key among those that are exempt are transaction costs, which may be volatile and can be difficult to predict. This means that the composition and nature of charges is not always obvious, creating a transparency deficit.
The PPI adds that transparency is also important. But it added there there was a risk that the drive for greater transparency, in terms of default strategies, may generate data that members or employers struggle to understand or use effectively.
Smart Pension director of policy and communications Darren Philp says: “Value for money goes way beyond charges. Clear and transparent charges are absolutely essential. Without them how can people assess value for money?
“But we need to develop a common framework for assessing, and importantly, comparing value. There is inevitably an element of judgement in such assessment, which is where robust governance must come to the fore.”
The report was informed by desk research, PPI modelling, and interviews with industry, the Department for Work and Pensions and regulators.