Pension Costs and Transparency Report

Published / Last Updated on 04/08/2019

The Work and Pensions Committee of MPs at the House of Commons has today released its quarterly report with this quarter focusing on “Pension costs and transparency”. 

It tackles a huge range of issues across:

  • Workplace pensions
  • Defined contribution pension schemes
  • Defined benefit pension schemes
  • The role of Trustees and Independent Governance Committees
  • Investment strategies
  • Providing transparency to individuals
  • Pensions dashboards
  • Advice and guidance
  • Net pay versus relief at source

Key areas that the committee focused on are an overall call to make all areas of pension charges more transparent.

In addition:

Defined contribution schemes have a suggested (but not enforced) charges cap of 0.75% pa.  Many pension schemes appear to fail this in some areas with not all charges including in the cap and for those with smaller pots and fixed charges, their pension pot could be wiped out over a longer period.  The committee suggested revising the cap and imposing on all pension schemes.

Defined benefit scheme trustees not investigating investment fund charges enough resulting in poor fund performance, schemes paying too much in charges with the combined result that schemes are in deficit.

Pension scheme trustees’ lack of investment knowledge and making poor investment decisions.  The committee has asked for decision template suggestions to help trustees.

Pension Drawdown/Flexibility:  the committee is already seeking the FCA to impose a maximum pension drawdown (decumulation charge) of 0.75% pa on default retirement pathways/lifestyle strategies.  There are indeed many pension companies that offer lower than this but when you start to look at platforms then the platform takes a charge of say 0.3% pa to 0.5%, the fund manager makes a charge of say 0.3% pa and then the adviser takes another 0.5% pa to 1.0% pa.  That’s could be 1.8%pa before you even start.

Financial Advice:  The committee suggests that many financial advisers are offering a good service but some are charging significantly more than others and not offering good value for money advice.  Indeed, given the higher costs, many people are not able to access good advice as they cannot afford it.  The committee suggested that more ‘guidance’ services rather than advice are needed, in particular to protect consumers from scams.

Net pay arrangements are not working for low earners.  If you are a low earner e.g. below £12,500 personal allowance and pay no income, if you then have a ‘net pay’ pension contribution deducted from your wages,  the pension contribution is deducted from your gross pay to give you then a ‘net pay arrangement’.  If you are a tax payer, then you have received tax relief on your pension scheme, indirectly, by only paying income taxes on your net pay after the pension contribution is deducted.  The pension scheme then accepts your contribution, via your employer, with no further tax relief to add as you have already received it right at the start.  But, what if you are a low earner?  You got no tax relief at the start via net pay arrangement taxation and then no tax relief added at the end when the pension company receives the payment.  Result:  No tax relief for low earners.  The committee has recommended that this discrepancy be resolved as a matter of urgency although freely admits the Government suggesting it would cost too much to put right.  In short, ‘two fingers’ low earners.

You can read the whole report here:  https://publications.parliament.uk/pa/cm201719/cmselect/cmworpen/1476/1476.pdf

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