• The Code signifies progress with disclosure to employers, but will be of limited assistance in assessing value for money
• Competitive charges are important, but optimising investment returns and adequate pension contributions are essential
Mercer welcomed the National Association of Pension Fund’s (NAPF) announcement on the Pensions Charges Made Clear: Joint Industry Code of Conduct which, from January next year, promotes further employer understanding of the impact of charges within defined contribution (DC) pension arrangements. According to the consultancy, the Code is an important industry shift towards transparency of pension provider charges and services.
However, Mercer voiced concern that the Code does not demand that pension providers answer the killer questions; namely, an assessment of the potential performance and volatility of the default investment option, and how they will encourage workers to objectively set and achieve realistic pension targets with informed levels of contribution into their pension pot.
Paul Macro, a Partner in Mercer’s Retirement business said, “By promoting greater transparency across the pensions industry and requesting clear communication about charges, the Code is a step in the right direction. However, it is critical that companies ask the right questions when shopping around for the best pension provider especially as they come up against their auto-enrolment responsibilities. Investigating the quality of the pension arrangement as a whole should be the aim. To achieve this, employers should be asking if their DC scheme provides a sufficiently high standard of governance, a competitive breadth of investment options, shrewd fund management and open employee communication. The scheme must deliver the standard of service and investment returns to meet the workforce’s needs.”
Mr Macro continued, “Disclosure of charges and fees is certainly part of the process, but assessing competitiveness necessitates a multi-perspective approach. It’s important to examine every aspect of the services being paid for, especially where participants will have little choice about paying for them if they want to benefit from employer contributions. It is also counter-productive to see the Code as anything more than a cost comparison tool. Ultimately, employers need to ask the crucial questions about how pension providers intend to deliver value to participants and how they intend to advocate adequate contribution levels, without which the pension scheme will be unable to meet workforce needs, irrespective of competitive charges.”
Mercer also highlighted that disclosing charges could cause operational problems to pension providers.
“Pension provider charges are typically rolled into one fee, taking account of administration, investment and other costs,” said David Barker, a Principal in Mercer Retirement business. “Providers will struggle to open up about investment charges. In particular, this is because it may involve divulging commercially sensitive information about internal cross subsidies and contractual arrangements with external fund managers, where their share of the charges will vary depending on future usage of their funds. A breakdown of these charges is therefore unlikely to be forthcoming, despite the Code.”
Mr Barker concluded, “It’s likely that, if the pensions industry does not embrace this industry-backed Code, legislative intervention will swiftly follow in its wake to help make auto-enrolment work”.
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