• Low cost can mean high risk to retirement pots
• Greater oversight by trustees and employers can improve retirement income
• After-fees results for members are important in DC arrangements
• Most workplace scheme charges far lower than current perception in the media
Low cost pension provision does not necessarily equate to low risk - a point that the current debate on pension charges has failed to take into account, according to Mercer. The firm agrees that making sure that fees are appropriate and transparent is important, but warns that the current debate focuses too much on the cost to members. Whilst important, this fails to give due consideration to the risks members face if their savings are only invested in so-called ‘low-cost funds’ and also fails to consider after fees performance.
According to Mercer, whilst investment strategies that seek to protect members’ savings against economic downturns and market fluctuations potentially cost more, they are key to ensuring there is sufficient money left in the pot on retirement.
Martyn James, Principal in Mercer Investments, said: “The current debate on charges seems to have lost sight of what should be the ultimate goal of any pension provision – providing the best possible retirement outcomes for members. Although it’s very important to have appropriate fees, it is also important to get the correct investment strategy in place to ensure the risk of investment losses is minimised. What is the point of paying low charges if the chosen investment solution leaves the members at high risk of losing their savings through market volatility?
“Putting in place an investment strategy driven by fees alone with minimum continued oversight from trustees and employers is no longer acceptable. Solutions to protect members’ savings might cost more and require a greater level of oversight by trustees and employers, but in the long run they can help improve member outcomes through better investment performance and less uncertainty at retirement.”
Fee reduction can have an impact on a member’s retirement outcome but importantly so can the choice of investment strategy. This can be demonstrated through a sample member with a pension pot of £300,000 (at 30 June 2007) who has the option to invest in two different funds, a low cost global equity tracker fund where the fee is 0.3% per annum, and a higher cost diversified growth fund (DGF)*, with a fee of c0.8% per annum, most of which aims to better protect against market falls. Moving the clock forward five years, the fund values would be worth £330,000 and £370,000 respectively after fees have been deducted. The higher cost DGF has outperformed in a period of extreme market turbulence.
Mercer also points out that most of the fee charges referenced in the press are simply not representative of the fee levels paid by members through occupational pension schemes. “From our experience most occupational pension schemes benefit from being in the institutional investment market and do not have fees anywhere near levels being quoted,” said Mr James. “We also believe that investment strategies should be considered appropriate if a trustee or employer believes that value can be added net of fees.”
“Quoting fee figures that are not representative for the majority of pensions savers is dangerous and could discourage employees from saving,” concluded Mr James.
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