Mercer welcomes the National Association of Pension Fund’s (NAPF) consultation on disclosing defined contribution (DC) charges to employers and its focus on expressing and explaining them in a consistent way. However, the firm considers that a stronger distinction should be made between those charges that impact member outcomes and those paid directly by employers to advisers and providers.
“A Code that encourages charges to be expressed and explained in a consistent way, allowing employers to easily compare potential pension schemes for use for auto-enrolment, is entirely sensible,” said Paul Macro, UK Head of DC in Mercer's retirement business. “It is important that employers understand how different costs are generated, how expenses are allocated and when they directly impact on members’ benefits. Since charges impact both directly and indirectly on members’ eventual benefits, providers and advisers should be able to explain the value that their costs and charges create.”
Mr Macro continued: “As well as separating out costs that have a direct bearing on member outcomes, it could also be important to distinguish between selecting an adviser, selecting a provider, and ongoing maintenance of a contract. These are distinct elements of pension provision, which normally occur at different times, so combining the information in one document might be misleading, for example, because they will ignore past investment in advice and because of the way charges and fees change over time.”
The NAPF’s draft Code of Conduct for disclosing pension charges to employers was developed in response to a challenge from the Pensions Regulator (the regulator). It sets out a framework for how employers should receive information about charges at the point they are choosing a pension scheme. The draft was developed with the help of an industry-wide Working Group and the consultation period ends on 4 July.
Mercer also highlighted that although the regulator’s initial challenge to the industry was to develop an approach “that can be used across all DC provision to enable better comparability of value for money”, encompassing charges, the task is also much wider in scope and should cover areas such as governance and investment. Mr Macro commented: “Whilst in some cases lower charges might lead to better value for money, this is not always the case and it is important that employers do not reduce their considerations to simply considering charges. There is a lot of evidence that investing in stronger governance can produce better member outcomes. Too great a focus on reducing charges to determine value for money could undermine progress that has been made, for example in improving member communications and benefit delivery. It would be a shame if the proposed Code’s emphasis had such a perverse result.”
“It is also very important for both employers and their employees to understand and appreciate that whilst low charges will result in higher benefits, if all else is equal, what is even more critical is the level of contributions that are paid into the scheme. The focus on charges should not detract from this overarching and fundamental message,” said Mr Macro. “Indeed, the complexity of assessing value for money means that disclosure of charges, without explaining their purpose, can have a negative impact since it discourages members and employers from making any provision.”
Mr Macro concluded: “We are supportive of this initiative but are concerned that this will be just one more document in the plethora of information available on pension scheme options and may cloud the picture rather than illuminate it.”
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