The introduction of low-cost stakeholder pensions in 2001 put downward pressure on annual management charges for contract-based pension schemes.
Despite an increase in the maximum allowable charge for stakeholder plans set up after April 2005 from 1% to 1.5%, competition among pension providers has kept charges on many group stakeholder plans, and some other personal pension schemes, at 1% or less. Charges for stakeholder schemes set up prior to April 2005 remain at 1%.
The cheapest funds in these schemes are normally index trackers, which aim to mirror the performance of stock market indices, such as the FTSE All-Share Index.
However, employers are increasingly offering more choice, and where a wider range of investment options are offered, the charges can be considerably higher than 1%. The 2006 Annual pension survey from the Association of Pension Funds (NAPF), found that nearly a quarter of defined contribution schemes had increased the number of funds on offer during the past year, with one in ten offering 40 fund choices or more.
Alex Reeves, pension consultant at wealth management firm Baigrie Davies, says: "Providing staff with a pension that offers a range of third-party funds gives them access to a wider range of specialist funds and asset classes not offered in-house by pension providers." This sometimes means higher charges. Overseas funds may be more expensive to manage and actively-managed funds are more labour intensive. Actively managed, specialist funds might also perform better and so provide a higher pension. But, as Tom McPhail, head of pensions research at Hargreaves Lansdown, notes: "Nothing comes with a guarantee."
Indeed, research published last February by Bates Investment Services, Bates UK All Companies Funds Value for Money Scores, found no link between charges and fund performance. High-charging funds produced some of the best results, but also some of the worst, with investment style and stock selection deemed more important in determining results.
Advisers argue that the range of fund choices offered should reflect the amount of advice employees are given access to. Richard Sheppard, pension manager at advisers AWD Chase de Vere, says: "Wider fund choices only really make sense where employers are prepared to pay for an adviser to sit down with staff and explain the risks."
Employers often feel responsible for monitoring investment performance, even though this is not a legal responsibility. Crispin Lace, a senior investment consultant at Watson Wyatt, says this is causing employers to offer fewer fund choices. "Employers who have [recently] put a stakeholder or personal pension in place tend to offer lots of fund choices. Those who have had their schemes longer are rationalising the number of choices because they feel unable to monitor them all."
McPhail argues that it is more important for employers to select the right default fund for staff who do not want to make their own investment decisions. By law, stakeholder schemes must have a default fund and these are normally provided in other types of defined contribution schemes too. According to the NAPF’s research, the default option is chosen by 90% of scheme members.
CASE STUDY: Center Parcs
Cost was a key concern when holiday company Center Parcs decided to close its trust-based pension scheme and replace it with a group personal pension.
Tim Parker, the company secretary, says: "We wanted to keep cost to a minimum without sacrificing quality of investment. Many of our 6,000 staff are part-time or lower-paid and we didn’t want to overburden them with charges." With the help of advisers Hargreaves Lansdown, the company picked the Friends Provident personal pension scheme, which offers a choice of more than 100 funds. The default fund is a mixture of Friends Provident and Artemis Global Growth managed funds. Center Parcs subsidises this fund to give an overall charge of 0.72%, while some other options under the scheme have annual charges of more than 1%.
"We expect most employees to opt for the default fund, but it is surprising how many are quite excited by the opportunity to manage their own fund choices," Parker adds.