Prudential's independent governance committee (IGC) has found members are getting better value for money after reducing all initial charges and has no major concerns about transaction costs.
In its second annual report on Prudential's contract-based defined contribution (DC) pensions, published today, the IGC said many members are now benefitting from lower charges as a result of action last year such as axing all exit fees and removing charges taken for adviser commission payments.
The IGC also said fixed charges for small pots will be eliminated by July, after raising concerns in last year's report about pots of less than £10,000 where the size was disproportionately affected by the fixed annual policy fee.
These fees are problem across the industry as people can have several small pots especially if they change jobs every few years.
The IGC's chairman Lawrence Churchill told PP there has been "big progress" on charges in the past year, and thinks "we can now start to put charges behind us".
He added: "Our view remains that what ultimately matters to members is the overall financial outcome achieved by their pension savings. Working on the basis that good financial outcomes that lead to higher retirement income are the most important, we have rightly continued to prioritise investment returns and charges as being the most important elements of value for money."
Having completed its initial review of transaction costs across Prudential's default fund and 20 other funds, the IGC found these charges were under 0.1% for 68% of assets, and 0.2% across 92% of assets. The IGC concluded there is "no significant leakage of value", and that where individual funds had higher costs up to 0.75% these had particular characteristics such as exploiting value capture in less liquid markets.
For example, the UK Property Fund had transaction costs and property expenses totalling 1.02% while Prudential's default fund had transaction costs of just 0.07%.
Churchill now wants to try to understand why there is a discrepancy between these figures and those in the Financial Conduct Authority's (FCA) asset management study which estimated transaction costs are 0.5%.
Room for improvement
However, there are other areas Churchill wants to make more progress on, such as the quality of member communications. The IGC will look at this over the year.
The IGC also still has concerns where members have selected higher charging investment funds. Churchill said a lot of these are called ‘specialist funds' but actually are just expensive bond funds for example and are typically linked to more than one provider. Members and their advisers were sent a letter last year to point out they could invest in similar funds at a lower cost, but just 11 out of 724 customers contacted Prudential to take action. The IGC will now consider what steps should be taken.
Another area that Churchill wants to look at are glide-paths, after being "surprised" to discover that few schemes have updated them to take account of the pension freedoms, with most still targeting tax-free cash and annuities.
Also, despite improvement in Prudential's process for overseeing its watch list for funds, the IGC is not yet persuaded it is good enough to provide good member outcomes and will push the provider to do more.
Prudential's IGC is the first to publish its 2017 annual report, with other IGCs expected to release theirs in the coming weeks.
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