Seeing the wood for the trees on member charges

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

Earlier this week PensionBee published its “Robin Hood Index” which suggested that NOW: Pensions was one of the most expensive pension providers.

The calculations they cited are inaccurate and misleading as they are based on 92 people with very small pots, transferring out – which is what we suggest they do. In their sample, c.40% of the values were below £100 and more than half were below £50.

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.

To illustrate, we compared our charging structure with those of PensionBee.

PensionBee offer three charging structures:

  • The PensionBee “Future World” Option charging 0.95% has higher charges than NOW: Pensions for pots over £2,770.
  • The PensionBee “Tailored” Option – their most popular fund charging 0.7% has higher charges than NOW: Pensions for pots over £4,500.
  • The PensionBee “Tracker” Option charging 0.5% AMC has higher charges than NOW: Pensions for pots over £9,000.

All three PensionBee options offer a reduced charge for pots over £100,000. Despite this, their “Tailored” and “Future World” options remain more expensive than NOW: Pensions, while the “Tracker” option becomes less expensive than NOW: Pensions once pot size exceeds £964,000, which is almost the lifetime allowance.

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.

Before the UK government introduced the charge cap for auto enrolment schemes in 2015, it took time to understand and analyse charging structures which clearly split out administration and investment costs.  The final regulations contained specific parameters for schemes which either charge a separate administration charge, or a separate contribution charge. The final regulations clearly explained that a charging structure such as that of NOW: Pensions may charge up to 0.5% as an annual management charge and remain comfortably within the charge cap so none of our members are paying above the charge cap. See p6 of DWP’s charge cap guidance.

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%

Comparing charges at the advent of auto enrolment is a dangerous game.  NOW: Pensions, and we hope the vast majority of our members, are in it for the long haul.  The Robin Hood index is rather short term and blinkered – some of its contributors seem to be unable to see the wood for the trees.

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