UK - Trust-based UK defined contribution (DC) schemes operate on an overall average cost of just over 2% based on contributions, or 1.23% if the charge is based on the size of the fund, according to a government report.

The report published by the Department for Work and Pensions (DWP), 'Charging Levels and Structures in Money-Purchase Pension Schemes: Report of a Quantitative Survey', showed that 73% of trust-based DC schemes use an overall charging method, while 21% break charges down to separate elements including fund management, administration, account set-up and intermediary commission.

Of those schemes operating an overall charge, 50% base it as a percentage of the fund, with the most common level set at 1% and an average of 1.23%, although this reduces as the scheme gets larger. Meanwhile, 19% of schemes base the cost as a percentage charge per contribution, resulting in an average cost of 2.08%.

The report noted scheme charges can be levied in a variety of ways, although less than 10% of respondents with a single charge used fixed or flat rate fees.
 
Findings from the survey of 800 managers of trust-based DC schemes showed the majority of overall charges are paid partly or completely by the employer, with just one in five employees taking on the whole cost. 

The research - conducted to understand current charging levels in the market ahead of the 2012 pension reforms - also revealed that front-loaded, or ‘upfront', charges are used by 5% of pension schemes to generate income and recover the administrative costs from new members fairly quickly. The report said this approach, found more commonly in smaller schemes, also encourages members to stay in the scheme for longer than a few years to avoid the contributions being eaten up by charges.

The survey also examined the charging structures in contract-based workplace schemes, such as group personal pensions (GPP) and stakeholder (SHP) schemes through a survey of eight pension providers covering 3,513 schemes.

The results showed basic annual charge levels are similar to trust-based schemes, as 55% of GPP/SHP schemes set an annual management charge of less than 1%. If the costs relating to intermediary commission are excluded, the standard AMC is under 1% for 96% of schemes. Meanwhile, 36% of contract-based DC schemes have an standard basic AMC of between 40-60bps, excluding commission. 

In a letter to survey participants, the DWP noted the research is part of the government's commitment to "monitor the pensions industry and the information collected in this survey of charging will enable the DWP to measure the potential impact of the workplace pension reforms".

These include the introduction of the National Employees Savings Trust (NEST) as a specifically low-cost scheme with the government announcing today that it is expected to have a charging level of 0.3% and additional charges of 2% on contributions to fund starting costs.

This is despite a lack of consensus in response to the Personal Accounts Delivery Authority's (PADA) consultation on the charging structure in 2008, which resulted in split views from the industry between the use of an AMC or a combined charge. (See earlier IPE article: Personal accounts charging structure splits industry)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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