Costs and charges for members of The People’s Pension

Find out about the costs and charges that affect members of The People's Pension, and see what our Chair had to say about costs and charges in this year's annual report

Member annual management charge

Every workplace pension scheme charges members for looking after their money.  You might hear this called an ‘annual management charge’, ‘management charge’ or ‘AMC’ for short.

Our charging structure is made up of 3 elements: a management charge based on the value of the member’s pension pot each year and applied on a daily basis, a potential rebate on some of the management charge (depending on how much is in the member’s pot) and an annual charge.

Transaction costs

Costs will also be incurred by investment funds when assets are bought, sold or lent by the fund. These are called ‘transaction costs’.

A member’s pension pot is indirectly affected by such costs as these reduce the net investment returns of the funds.

Chair’s annual governance statement on member costs and charges…

 
Steve Delo, Chair of The People’s Pension Trustee, gives an annual governance statement each year. The section about charges and transaction costs from his most recent statement (for year ended 31 March 2019) is included below.

For the full governance statement, download The People’s Pension Scheme annual report and financial statements.

Steve Delo, Chair of the Trustee for The People's Pension

 

Charges and transaction costs

During the year, the Scheme operated an AMC of 0.5% across all funds, including the default investment profile and all non-default options. The Scheme is compliant with the statutory cap of 0.75% of funds under management and operates well within it.

The Trustee took a decision to increase the value delivered to members and, in February 2019, announced it will amend the AMC structure that members pay from a flat fee to a new structure. This change means the percentage a member pays as a charge will fall as their pension pot grows. This will vary between 0.5% and 0.2%.

Considering the breadth and quality of the Scheme’s core service elements (investment, administration, communications, governance), the Trustee is satisfied that the costs are appropriate for the Scheme both as a whole and when compared to other options in the market. The Trustee believes the Scheme represents good value for members.

The Trustee has reviewed the transaction costs associated with the investment funds used by the Scheme. Transaction costs are a component of the overall costs borne by members, as they have the effect of reducing the net investment returns of the funds.

Transaction costs are incurred by pension schemes in two ways. Firstly, a fund manager will trade in markets to invest money flowing into or out of a fund (when scheme members contribute to or leave a

fund). Secondly, they will implement investment decisions in the course of the day-to-day management to achieve the fund’s objectives.

Until the recent involvement of the FCA there has been no agreed definition of transaction costs across the industry, although they can be broadly broken down into explicit and implicit costs. Explicit costs are observable and, where the costs are incurred, an invoice could be generated. Examples include brokerage fees, stamp duty and custodian fees, and foreign exchange levies.

Implicit costs cannot be directly observed and cannot be invoiced. These include bid ask / offer spreads, implementation shortfall (the difference between the decision price and the execution price of a trade) and market impact (the change in the price of a security caused by the trade). Implicit costs will use a `slippage cost’ methodology to calculate the market impact of trading. This method calculates the trading cost by comparing the price at which the transaction was actually executed with the price when the order to transact entered the market. Implicit costs can be positive or negative depending upon whether market movements were favourable.

The costs for the year 1 April 2018 to 31 March 2019 are shown in the table below…

Investment fundImpact on returns
Global Investments (up to 85% shares) Fund*-0.004%
Global Investments (up to 100% shares) Fund-0.01%
Global Investments (up to 60% shares) Fund0%
Pre-Retirement Fund*0%
Ethical Fund0%
Annuity Fund-0.01%
Shariah Fund-0.01%
Cash Fund0%

*These are the component parts of the default ‘balanced’ investment profile.

As noted above, a consequence of the implicit slippage cost calculation is that it can produce negative transaction costs if the implicit cost is negative and is greater than the effect of the explicit transaction costs. As the table above illustrates two of the funds had a negative transaction cost (shown as a positive figure). Given certain implicit costs, this sort of negative performance effect – which marginally boosts performance – is always positive but not guaranteed.

While negative transaction costs should not be taken to mean that trading in the market carries no cost, by reviewing underlying data and associated disclosures, the Trustee is comfortable that the level of transaction costs incurred by the funds are reasonable, in line with other providers and represent a small proportion of the overall cost. An illustrative example of the effect of the annual management charge of 0.5% and the transaction costs for the ‘balanced’ investment profile is shown in the table below…

Years in schemePot value before costs and chargePot value after costs and charge deducted
1 year£2,670£2,660
3 years£5,260£5,210
5 years£8,200£8,080
10 years£17,300£16,900
15 years£29,700£28,500
20 years£46,300£43,800
25 years£68,000£63,600
30 years£96,600£88,900
35 years£132,000£120,000
40 years£174,000£156,000
45 years£222,000£196,000

The assumed growth rate for the ‘balanced’ investment profile is made up of the Global Investment (up to 85% shares) Fund at a 4.5% growth rate, gradually switching into the Pre-Retirement Fund at a 3% growth rate in the last 15 years.

99% of the membership are in the balanced lifestyle profile as illustrated above.

Projections of other funds

See the full details of the Scheme transaction costs, and projections for other funds available in the Scheme, on our page about transaction costs…