Low member engagement, poor scheme governance, and multiple pots can be equally as detrimental to defined contribution (DC) funds as opaque charges and high costs, research finds.
According to Pension Charing Structures and Beyond: An Outcomes-focused Analysis - a report published by the Pensions Policy Institute (PPI) and commissioned by Smart Pension - despite heightened focus on costs and charges, there is no hard and fast rule on the impact of fees.
The report, published today (11 September), also found that low charges do not necessarily guarantee good value and can ignore a broad range of hidden costs, while no single charging structure will work best for all members.
For example, combination charges - containing an annual management charge (AMC) combined with a flat fee or a contribution fee - do not penalise deferred members when they are no longer contributing, but can reduce the benefits of active members making additional contributions.
Similarly, an AMC-only structure allows for smaller pots to benefit from cross-subsidies from other members with larger pots, creating a greater disadvantage for those with the most savings.
But, alongside these charge considerations, the way savers accumulate funds in multiple pots can make it easier to lose track of pots, while some charging models could penalise this behaviour.
Despite this, each potential method to keep savers in one scheme also has drawbacks. Forcing savers to only ever save into one pot can have varying outcomes depending on which provider they are first enrolled with; conversely, pot follows member relies on the nature and order of providers. Finally, member-borne consolidation requires higher engagement.
PPI senior policy researcher Mark Baker said the research showed it was important that charges were considered alongside myriad other factors.
"Automatic enrolment has two unique features that can work against savers achieving optimal outcomes," he said. "The first is that members do not always have influence over the scheme their employer elects to enrol them into, and the second is that they are likely to approach retirement with multiple pension pots accrued across different employers and schemes."
While there are potential ways to mitigate these actions, "none of the strategies will guarantee better outcomes alone", Baker added.
The research noted that higher member contribution levels tended to be the biggest factor in improving outcomes, estimating an extra contribution equal to 2% of salary could boost retirement income by 25%, regardless of charging structures.
Smart Pension director of policy and communications Darren Philp said: "As we all know, value for money goes way beyond just charges. Clear and transparent charges are absolutely essential.
"Without them, how can people assess value for money? But we need to develop a common framework for assessing, and importantly, comparing value. There is inevitably an element of judgement in such assessment, which is where robust governance must come to the fore."
The report found ‘value for money' is an important consideration, but can be hard to define, a conclusion also reached by the Work and Pensions Committee in August.
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