Trustees and company management are increasingly unaware of DC pension scheme costs, as an alarming lack of transparency continues to surround the fees associated with pension funds, a new LCP report has found. It adds further weight to industry calls for greater clarity and openness on fees and charges and to Professor John Kay's recent review of UK equity markets and long-term decision making where a lack of transparency was highlighted as a major theme.
The LCP DC Fees Survey of over 300 funds revealed that around 30% of DC investment providers were unwilling to provide details of the indirect costs associated with their funds.
The report also found that costs continue to be substantial. For diversified growth funds, which are often used as the default option for DC schemes, total costs were found to be as much as 50% higher than the headline direct annual management charge, often because fees charged by external holdings in these funds are not disclosed. In some instances, where account trading costs were also taken into consideration, the combined additional costs increased to more than 100% higher than the quoted annual management charge.
Heather Brown, investment partner at LCP and author of the report said: "Our first report on DC investment fees shows that the overall costs for DC funds can be substantial, which is a particular concern at this time with the imminent introduction of auto-enrolment and the expected growth in the number and size of DC pension arrangements throughout the UK."
"More transparency on fees is needed to help employers, trustees and pension scheme as this could lead to lower costs, which should result in larger pensions for members. In particular, attention needs to be paid to the fees charged for the default investment option as this is where the majority of DC scheme members invest" she added.
The report also highlights some of the options to mitigate rising costs for employers, employees and trustees. These include:
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Providers will negotiate fee levels for growing schemes. Trustees and company management should look to negotiate fees, particularly when the scheme's membership profile has changed
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Research is important as fees vary widely and also display significant variations from provider to provider within each category
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Bundled schemes can, in practice, be more cost effective than unbundled
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Fees for default options need particular scrutiny
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GPP charges are generally lower than stakeholder charges?
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