Prudential has reduced charges and axed exit fees to deliver members value for money following recommendations from its independent governance committee (IGC).
The IGC's first governance report published today found although the majority of members were getting value for money, there was room for improvement in certain areas.
The reductions equate to an average 15% fall in certain charges across the workplace group pensions business, and any exit charges have been removed. This means that many members will pay lower charges later this year.
After recommendations from the IGC, Prudential agreed to reduce to remove member charges on all unit-linked and with-profits business. This includes removing any additional charges associated with initial/capital units, and removing all charges taken for commission, and increasing allocation rate to ensure 100% of contribution is invested.
The provider also decided to get rid of all exit charges on trust-based defined contribution (DC) schemes, ahead of a forthcoming regulatory cap on these charges.
Scottish Widows recently announced it would axe all exit charges, while Royal London is getting rid of several but not all.
The IGC will monitor Prudential's implementation of these actions this year.
However even after applying these changes, the IGC still found 8,000 policies which with charges above the reference points. IGC chairman Lawrence Churchill said of the 5,700 policies within the IGC's remit, around 4,000 related to small pots of less than £10,000 where the size was disproportionately affected by the fixed annual policy fee.
Churchill said this is a problem across the whole industry, as people can have several small pots especially if they change jobs every few years. He wants this issue to be tackled and his committee is in discussion with regulators and other IGCs about whether a consistent approach can be taken.
A second problem was that around 1700 members had self -selected funds with higher charges. Prudential is writing to members to inform them and ask if they want to change to a fund with fees below the reference point.
Communications is one area where Churchill believes the firm can do better. He is concerned that people are not engaged in their pensions which could be detrimental when it transpires in a few years' time that contributions have not been high enough. He believes that IGCs can play a role in getting out this message to people.
Prudential executive director of UK and offshore Tulsi Naidu said despite progress there was clearly more to do in the year ahead and that it had agreed with the IGC to make communications easier to understand.
More work will need to be done on understanding the impact of transaction costs, which are typically unreported to members. The IGC analysed investment returns after the impact of transaction costs and fees but has not yet investigated the breakdown of the costs.
- Cap policy fees to a maximum annual level of £24 by 31 March 2016.
- Engage in customer research directly with members of small pots from 30 June 2016 .
- Remove commission charges and assess funds from 30 September on all unit-linked and with-profits business: remove any additional charges associated with initial/capital units; remove all charges taken for commission, increase allocation rate to ensure 100% of contribution is invested.
- Address remaining small pots (31 December 2016).
Impact of the charge reductions
- Across the Independent Project Board population, including auto-enrolment (AE) schemes, the average charge falls from 1.26% to 0.92%.
- For non-AE schemes but including trust-based schemes the average charge drops from 1.48% to 1.02%.
- For non-AE schemes which are contract based, average charge falls from 1.22% to 1.04%.
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