The people’s pension lower charges – what is the impact?
The People’s Pension (TPP) has announced a reduction in charges for their master trust to incentivise pension saving and improve the retirement outcome for members.
From summer 2019 charges will reduce for each member as their savings grow and move through a banded structure. Depending upon the amount saved, an average earner saving over their working life could see their lifetime Annual Management Charge (AMC) reduce by more than half from 0.50% to 0.23%.1
This is great news for members of TPP master trust. Whilst their announcement states that they are able to do this because of their not-for-profit status, it highlights how important charges are to achieving a good outcome for members.
B&CE, provider of TPP, states that an average earner saving over their working life with TPP could potentially increase their pension pot at retirement by:
- almost £55,000 when compared to a lifetime fee set at the charge cap of 0.75% - nearly five years' additional retirement income.
- almost £30,000 when compared to a lifetime fee set at 0.50% which members of The People’s Pension currently pay – nearly three years' additional retirement income.
Details of the changes
A member’s AMC will reduce as their savings increase through the following bands, with the charge they pay shown simply and transparently in pounds and pence each month in their online account:
An example of how the new charging structure will work
If a member has £40,000 in pension savings, they would currently pay 0.5% on this amount which is £200 per annum. When the new banding structure is in place, their charges will be calculated as follows:
- £3,000 will be charged at 0.5% = £15 cost per annum;
- £7,000 will be charged at 0.4% = £28 cost per annum;
- £15,000 will be charged at 0.3% = £45 cost per annum;
- £15,000 will be charged at 0.25% = £37.50 cost per annum;
- Total cost of £125.50 per annum, which is an annual saving of £74.50.
The full announcement can be found on the B&CE website, including further detailed examples.
Pressure on all pension providers to follow suit
The move has been praised by the Minister for Pensions and Financial Inclusion, Guy Opperman, who said:
“I’d encourage all firms to look at what they can do to ensure they keep delivering value as the amounts saved continue to grow.”
Patrick Heath-Lay, CEO of B&CE, also commented that:
“Providers need to respond imaginatively to ensure Auto Enrolment is attractive over the long-term, rewards people for saving and incentivises the consolidation of multiple pots.
Charges can eat away at pensions, and on a flat-rate, percentage fee savers pay a lot more in pounds and pence the more they save. We’re reducing members’ annual charges as a percentage of their savings in line with the growth of their pot, potentially boosting their retirement income by thousands.”
Employers should consider if their scheme is still competitive
Employers have a responsibility to constantly monitor the charges on their workplace pension scheme to ensure that they are competitive, and also to ensure that the scheme delivers value for money for their members.
This announcement by the TPP is reflective of the many developments within the workplace pensions market since Auto Enrolment was introduced. Pension providers, working with their respective independent governance committees (IGC), have been under pressure to improve value for money, and generate better outcomes for members. Developments include:
- more competitive and transparent charges;
- changes to default investment funds and lifestyle options to enable members to access pension freedoms with the right investments;
- considerable investment in improved systems to facilitate better administration, reducing time and risk for employers in data management and meeting deadlines set by The Pensions Regulator; and
- development of digital applications to improve communication and engagement with members, helping them to understand their pension and make the right choices.
Given this changing and improving environment, and the needs of members as their pension pots grow, employers need to look closely at their current pension scheme relative to the market today. Employers should examine whether they can achieve lower charges, more suitable investment choices, and enhanced services for themselves and their employees by changing to a new scheme, and possibly also to a new pension provider.
1. The People's Pension
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