A charging structure that makes it pay to save

Rob Booth, Director of Investment & Product Development, NOW: Pensions

When NOW: Pensions entered the UK market in 2011 we spent a lot of time thinking about how to structure our member charges so that they are simple, transparent and above all equitable.

Most pension providers charge a flat annual management charge based on percentage of the fund. However, we took the decision to combine a low investment charge (0.3%) with a pounds and pence monthly administration charge – £1.50 per month for all members.

By structuring the charge in this way, it’s clear to members how much they are paying for investment management and how much for scheme administration and communication. By structuring the charge this way, it also means that those with larger pension pots aren’t overly subsidising those with smaller pots.

As members continue to save with us and as auto enrolment minimum contributions increase, the charges as a proportion of their pension pot will reduce which means that those who save with us over a number of years will see their overall equivalent charge reducing.

We encourage leavers to consider consolidating their pension funds as it may be more cost- effective and we don’t charge for transfers into or out of the scheme.

This dual charging structure is very cost efficient over the long term as the following illustration taken from the Defaqto report on workplace pension default funds illustrates.

Member Charges Providers Value after….
AMC Additional Charge 10 years 20 years 30 years 40 years
No Charge £28,822 £84,364 £186,176 £367,089
0.30% + £1.50 pm NOW: Pensions £28,119 £80,942 £175,464 £339,464
0.30% + 1.8% NEST £27,863 £80,207 £173,871 £336,381
0.40% £28,227 £80,806 £174,143 £334,821
0.50% Aegon, B&CE, LGIM £28,080 £79,947 £171,289 £327,309
0.60% Welplan £27,935 £79,099 £168,494 £320,007

These calculations assume:

Salary at start of process:             £25,000

Salary growth rate:                         2.5% pa

Investment growth rate:               5.0%

Total contribution pa:                    8%

Structuring our charges in this way rewards long-term saving as we hope the vast majority of our members, like us, are in it for the long haul.

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