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 2020) 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

 

Member-borne charges and transaction costs

The Trustee is required to set out the on-going charges borne by members in this statement, which are annual fund management charges plus any additional fund expenses, such as custody costs, but excluding transaction costs; this is also known in the pensions industry as the total expense ratio (TER).

The Trustee prefers to use a simpler phrase for the TER in its communications, and calls it the member annual management charge.

During the year, the Scheme operated a management charge 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.

Since the Scheme year end, the Trustee amended the member annual management charge to continue delivering value in a challenging environment. So, as at the publication date of this report, it is made up of 3 elements:

  1. An annual charge of £2.50 for all members – which we introduced after the Scheme year-end and which will start being deducted by the end of the 2020/21 Scheme year.
  2. A 0.5% management charge, levied on a member’s pot each year.
  3. A potential rebate on some of the management charge introduced in the Scheme year. The level of rebate depends on the member’s pot size and typically they’ll receive a rebate of between 0.1% on savings over £6,000 and 0.3% on savings over £50,000. This is designed to encourage members to stick with retirement saving. Following the Scheme year-end, we announced the entry point for the rebate will lower from £6,000 to £3,000, at around the same time in which we deduct the first annual charge.

Considering the breadth and quality of the Scheme’s core service elements (investment, administration, communications, governance), the Trustee is satisfied that the costs and charges 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 reviews the transaction costs associated with the investment funds used by the Scheme at least annually, and most recently at the 6 August 2020 Trustee Investment Committee meeting. 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.

Transaction costs 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 2019 to 31 March 2020 are shown in the table below. The transaction cost data was provided by the Scheme’s investment manager, SSGA.

Default arrangement: charges and transaction costs

The Scheme’s default arrangement is used by 98.78% of the membership (as at 31 March 2020).

FundManagement chargeTransaction costs
Global Investments (up to 85% shares) Fund*0.5%0.061%
Pre-Retirement Fund*0.5%0.049%

*These funds are also available as self-select options.

Self-select investment options: charges and transaction costs

FundManagement chargeTransaction costs
Global Investments (up to 60% shares) Fund0.5%0.051%
Global Investments (up to 100% shares) Fund0.5%0.076%
Ethical Fund0.5%0.016%
Annuity Fund0.5%0.018%
Cash Fund0.5%0.009%
Shariah Fund0.5%0%

Illustration of charges and transaction costs

An illustrative example of the effect of the 0.5% management charge, any rebates due on the management charge and the transaction costs for the balanced investment profile is shown in the table below. The illustrations have been prepared in accordance with the Department of Work and Pensions’ statutory guidance on “Reporting costs, charges and other information: guidance for trustees and managers of relevant occupational schemes” on the projection of an example member’s pension savings.

Although the majority of the Scheme members use the default investment profile, the Scheme has a number of options available to choose. Projections for these are shown on our webpage about transaction costs.

Years in schemePot value before costs and chargePot value after costs and charge deducted
1 year£1,710£1,700
3 years£5,480£5,430
5 years£9,740£9,610
10 years£22,800£22,300
15 years£40,200£39,000
20 years£63,100£60,600
25 years£92,700£88,400
30 years£130,000£123,000
35 years£178,000£167,000
40 years£232,000£217,000
45 years£293,000£273,000

The ‘balanced’ investment profile, consists of the Global Investments (up to 85%) Shares Fund (projected growth rate 4.0%), gradually switching into the Pre-Retirement Fund (projected growth rate 2.5%) in the last 15 years.

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…