The Pensions Regulator

Q&As: DC schemes

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Charges

What do you mean by 'charges'?
Why is the regulator interested in charges?
What would be a disproportionate charge and how does the Pensions Regulator propose disproportionate charges can be identified?
Does the regulator believe that those running DC schemes should focus on 'value for money' rather than absolute costs?

What do you mean by 'charges'?

• Charges may take many forms and vary greatly from scheme to scheme, both in amount and in the way they are applied. The rules of an occupational scheme and the conditions of the contract in a GPP include the charges that can be levied.
• Charges that are applied to DC funds may include flat rate fees (eg a monthly policy fee unrelated to the fund size), deductions from the fund (eg the annual management charge is usually expressed as a percentage of the fund value), initial charges (eg set-up costs such as the bid-offer spread: the difference between the prices at which investments are bought and sold), exit charges (eg transfer fee if member transfers to a different scheme).
• In terms of our interest in charges, our focus is on charges which impact directly on members' benefits, although we recognise that expenses incurred in other areas are also significant.
• You can find more information about charges in our Trustee toolkit.

Why is the regulator interested in charges?

• Charges are a key factor in determining the level of a member's benefits.
• The regulator wishes to see that:
  • charges are taken into account, for example when investment managers are selected and when the range of fund choices is determined;
  • members receive an explanation of charges that may affect decisions that they need to make; and
  • charges are kept under review.
• We recognise that members sometimes derive benefits in ways that are not easily valued such as education, access to advice or clarity of communications.

  We therefore have no plans to provide guidance on what level of charges might be acceptable.

What would be a disproportionate charge and how does the Pensions Regulator propose disproportionate charges can be identified?

• Schemes have a wide variety of benefits and charging structures. Furthermore, members sometimes derive benefits in ways that are not easily valued, such as education, access to advice or clarity of communications.

  It's not therefore feasible to define a level of charges which is appropriate in all cases and we have no plans to provide guidance on what level of charges might be acceptable.

• The only schemes where charges are subject to a statutory limit are stakeholder pensions.
• Trustees of occupational schemes should consider whether charges are reasonable when compared to the benefits members receive in return. We would hope that in a GPP an employer would have a similar interest in obtaining value for money.
• If charges under an occupational scheme appear to be disproportionate, the regulator may raise the matter with the trustees.

  For example, the regulator has taken action to reduce costs incurred by schemes in winding up.

• We expect that charges that may affect decisions that members need to take are transparent to members.
• In GPPs, the FSA rules and principles include a principle that providers must treat customers fairly which includes guidance on product design.
• We would work closely with the FSA in the case of charges by providers of GPPs appearing to be disproportionate.

Does the regulator believe that those running DC schemes should focus on 'value for money' rather than absolute costs?

• Trustees of occupational schemes should seek to obtain value for money on behalf of members.
• We are not saying that cheaper is better, but that those with responsibility for decisions that have an impact on the cost of running a scheme and on the charges a member will have to pay give due consideration to the members' interests.
• Schemes have a wide variety of benefits and charging structures. Trustees of occupational schemes should consider whether charges are reasonable when looked at in comparison to the benefits members receive in return.

  We would hope that in a GPP an employer would have a similar interest in obtaining value for money.

• It should be recognised too that members sometimes derive benefits in ways that are not easily valued.

  Obtaining 'value for money' means looking at the overall package being offered by a service provider – for example, the quality and nature of communications to members; the level of investment returns; frequency of meetings; quality of reporting; effectiveness of service delivery.

• It's not feasible to define a level of charges which is appropriate in all cases and the regulator will not be providing guidance on what level of charges might be acceptable.
• Trustees of occupational schemes should consider whether charges are reasonable when looked at in comparison to the benefits members receive in return.
• In a GPP, we encourage the employer to become involved in considering the charges when selecting and reviewing a GPP provider.

  There's more information on this in our guidance on voluntary employer engagement in GPPs. Employers may wish to use the FSA comparison tables which show the differing charges from providers of personal pensions and stakeholder pensions.

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