Employers are being given more choice in the pricing structures of investment funds by pension providers who realise that ‘plain vanilla' is good for some but not for all.
The trend towards broadening of choice and be-spoking schemes to suit individual clients applies to charges as much as to any other aspect of DC design and delivery.
Building flexibility into pricing structures means that employers now have a choice of offering a simple, flat charge to members for any type of investment fund in a scheme’s fund range or a price for each individual fund. There are also many in-between options such as a pooled price for actively managed funds and another pooled price for passive funds.
All of these options are worthy of consideration and have benefits to suit different employer needs. The flat charge, calculated from pooling the underlying cost of each investment fund across the fund range, is a practical way of simplifying charges and fund choice for scheme members.
Where employees are more inclined to make active fund choices and informed decisions about risk and returns, individual pricing has the edge. It is more flexible in terms of pricing to suit different schemes and individual budgets and encourages investors to make a choice between active and passive funds. Typically the individual pricing route will allow exposure to different asset classes at a lower cost through index trackers. However, the actively managed funds will tend to be more expensive than under a pooled approach.
Pricing structures that are neither entirely pooled nor entirely individually priced offer a more bespoke option for employers who are interested in how charges will impact on employees, particularly when defined contribution schemes are used to replace defined benefit provision. It is possible, for instance, to individually price the majority of the fund range whilst retaining a flat rate for a core fund range. When doing this it is also important to consider the lifestyle strategy. It is not desirable to set a lifestyle arrangement that results in charges increasing as a member approaches retirement.
The differences in cost between funds – passive or active – tends not to be great, so employers should bear in mind that the lowest headline rate may not always be the best deal for their workforce.
What employers need to know is that providers are now much more willing to be flexible with fund pricing structures than was the case in the past. It is worthwhile to consider what would suit their own workforce and be prepared to discuss the options to get the right fit and the right method of charging.
Martin Palmer is head of corporate pensions marketing at Friends Provident
