Are DC members set to get a better deal?

Most defined contribution scheme members will not know how much they pay in fees for their scheme.

But is it any wonder when charges vary so much depending on size of scheme assets, whether it is active or passive management, bundled or unbundled and how frequently investments are traded?

Even The Pensions Regulator (TPR) is stumped.

The watchdog’s discussion document on enabling good member outcomes in DC schemes, published a few weeks ago, threw up some interesting points, including, perhaps unsurprisingly, that greater transparency is required around DC charges.

TPR executive director of DC, governance and administration June Mulroy admits that even the regulator was confused by some of the charging structures bandied about in responses to the paper.

To remedy this, Mulroy says TPR is actively pursuing the charges issue with a number of the big providers and is expected to publish a description of what is ‘good’ when it comes to DC charges in the autumn.

“What we are trying to get across to members is: this is how much their scheme has cost them. It is attaching the cost to the value people perceive coming out of it,” Mulroy says.

So, if the industry regulator is perplexed by DC charges then what hope is there for the rest of the industry, let alone those most affected scheme members? And will auto-enrolment and NEST help demystify DC scheme charges?

Charging structure

It is worth reminding ourselves at this point of the charging structure in DC schemes.

The fattest fees in DC tend to be in bundled arrangements, such as group personal pensions, where the member has a contract with a provider whose platform fund charges are put on the price a member pays.

This might include an admin fee and management fee for managing the assets.
Fund management carries a charge for physically managing the money and also for running the fund.

The annual management charge (AMC) is levied by the investment manager each year to cover the costs of running the fund.

Then there is the total expense ratio (TER), which includes the AMC plus extras for running the fund, such as accounting, custody fees, and tax charges.

That is not to mention charges dependent on a scheme’s assets under management and on the cash flows.

Members who like to manage their own investments could also be charged for switching funds between asset classes or managers.