A review of pensions policy in 2021

Many of the policy changes discussed in 2021, like pensions dashboards, will be difficult to accomplish but will bring real improvements for savers. We have more questions about other initiatives, but have no doubt the Department for Work and Pensions (DWP) is trying to improve the UK pension system.  

Pensions dashboards

Big projects, like the pensions dashboards have seen major progress this year. The main contracts for the systems that will make the dashboards work have been issued by the Money and Pensions Service and they are progressing towards staging schemes on dashboards from early 2023.

Most of the legal and regulatory rules that will underpin how dashboards work have yet to be published, so there is still much to do. Similarly, we haven’t seen the application programming interface (API) that will be used to link together pension scheme member databases and the dashboards information architecture. It’s imperative that schemes get confirmation on the final requirements as soon as possible so that preparation can begin in earnest.

Small pots

In late 2020, the DWP working group produced a report recommending that the industry look at the policy and administrative issues around automatic consolidation of small pots. So, this year there has been further investigation into the small pots issue. And now following a report by the Pensions and Lifetime Savings Association (PLSA) and the Association of British Insurers (ABI) working group, there is a need for further action by policymakers. It is likely we will need legal and potential primary legislation to make small pot consolidation a reality. We hope that both the government and the industry will return to the table in 2022.

Communications and engagement

We now have final regulations for the simpler annual benefit statement.

The statement is now a known quantity. For most people, it’ll be a clear and standard-comparable document. For some (potentially those with more than one job or a protected pension age) it may look different, but not significantly so.


On investments, we have seen a renewed focus on investing in illiquid assets. Much of the government views rapidly growing DC funds as an easy source of capital for national economic priorities.

Measures like changing the charge cap are being suggested, which we see as ineffective. But other measures, like a new fund structure, are more likely to enable greater diversification in how DC funds invest. Broadly, we see investment in unlisted assets as potentially desirable given the large body of work showing an illiquidity premium for the schemes capable of capturing it.

The market for workplace DC is, however, very price-sensitive. Investing in unlisted assets is typically much more expensive than investing passively in listed equities and changing scheme asset allocations to invest in unlisted assets would most likely pass through to member charges.

Value for money

Which brings us to The Pensions Regulator and the Financial Conduct Authority framework for value for money. Making the workplace pension conversation about value, rather than just charges, is a sensible aim. Initially, the regulators’ value-for-money framework is intended to help pension professionals assess value, but, in time, we expect metrics to be developed that are consumer facing.

Our view is evolving. The focus on the proposed framework consultation paper in judging the quality of scheme oversight, investment and costs and charges is mainly right. The Pensions Policy Institute’s recent piece on the global experience of value for money also highlighted the importance of governance as a theme. It’s something we hope both regulators will return to.

So, while we expect 2022 to be equally busy, the hope is that policymakers keep the bigger picture in mind. 

Tim Gosling, head of pensions policy at B&CE, provider of The People’s Pension

Leading the value debate and meeting newly-engaged member expectations

When saver engagement comes – and I guarantee it will – how can we show the value of what we offer? As saver interest grows, can we tell the story of how we’re all helping to plan for our members’ futures and, if so, will we be able to service all their enquiries and not let them down?

The price of a family car

Common sense tells us the more a member has saved, the more involved they’ll be with their pension savings. It’s noted in Australia, who’ve had auto-enrolment since the 1990’s, that people take an interest in their savings when the value of their pot reaches the price of an ordinary family car.

Auto-enrolment, pension growth and increasing member engagement

As we approach the UK’s 10-year anniversary of auto-enrolment, pension pots are growing, and people are beginning to take more interest in their savings. We’ve seen this in our own members, where those who have more saved are more active in their online account.

So, as providers, employers, and financial professionals, we need to prepare ourselves for more engaged members, the questions they’re likely to ask, and the support they may need.

What is the charge?

Once engaged, charges often come as a bit of a surprise to savers, and 2 questions they will ask are, ‘How much am I being charged?’ and ‘Can I get it cheaper elsewhere?’ The Cheapest isn’t always the best, but in the case of pensions, value for money is important.

Value for money

Value for money for the newly-engaged saver is important, and what charges are paid for in pounds and pence is essential.

Flat percentage charges increase the cost to the member as their savings grow. So, to improve value for money, many financial companies reduce charges gradually as a member’s savings grow.

Employee benefits benefit employers too

Employers also want value for money from their workplace pension schemes too. Research tells us that employees value their employer’s pension contributions – second only to holiday entitlement. A scheme that lowers a member’s charge as their pot grows, effectively rewards loyal employees.

For employers, it’s very difficult to examine value for money at an individual level. Therefore, offering a scheme that reduces employees’ charges demonstrates value and promotes ownership of the journey towards an affordable retirement.

The shift from defined benefit to defined contribution pensions places greater responsibility on the member. Individuals approaching retirement must decide what to do with their savings and consider competing future variables, such as longevity, inflation, investment returns, and risks. How can we help them see the importance of those decisions?

Creating the journey

Our long-running New Choices, Big Decisions longitudinal study highlights that as people approach retirement, financial decisions can be made with little grasp of the full facts. Instead, they often choose the path of least resistance.

As an industry, we’ve confused savers instead of creating a simple journey of saving and then spending. What’s needed are guided routes into retirement, starting long before retirement approaches, when trigger points activate engagement and forward thinking. We must make it easier for them to become engaged with their savings and show our value.

Knowing how much money they have, who they can pass it on to if the worst happens, and where they can get simple retirement planning tools may be enough for some savers. For them, accessing their pot online must be the first step.

Pension engagement has been smouldering for years, but with a few small steps we can help ignite future interest for savers who want to know more. Employers, pension providers, and trusted financial advisers all have a role to play here in driving engagement and demonstrating value. The end destination should be a comfortable retirement. How savers think and approach that, along with lessons for us all, are discussed in our New Choices, Big Decisions report.

The People’s Pension divests £226m

The People’s Pension removes £226m from businesses that fail to meet its ESG standards

Leading workplace pension scheme, The People’s Pension1 has today announced that it has removed investment in companies worth up to £226m from its funds because these businesses have failed to meet its rigorous ESG (environmental, social and governance) standards2.

The workplace pension scheme has worked closely with its fund manager, State Street Global Advisors (SSGA)3, on the policy which led to the initial removal of approximately 150 stocks from its portfolio.

The divestment targets controversial weapons companies as well as organisations linked to severe controversies involving human rights, labour, environment, and corruption. Such companies are deemed to present some of the most severe types of ESG-related investment risk4.

Jon Cunliffe, managing director of investments at B&CE, provider of The People’s Pension, said:

“We’ve taken the significant step of divesting from companies which fail to meet our ESG standards because of the risks they pose to member accounts and the reputation of the scheme.

“As engagement with companies which flagrantly breach good practice is unlikely to work, we have removed investments from these holdings, in the best interest of our members.

“Both SSGA and our Trustees have worked very hard to get to this point, and we know that this decisive action will have the support of our members as our polling tells us that responsible investment is important to them.

“These exclusions underline our commitment to being a responsible investor, which we put at the heart of our decision making2.”

Alistair Byrne, managing director, head of retirement strategy at State Street Global Advisors, said:

“ESG considerations are an increasingly crucial aspect of the investment strategy of any pension scheme. We are delighted to have been able to work with The People’s Pension to design and implement these changes, creating a more robust and sustainable default fund for their millions of members. We look forward to continuing our collaboration to evolve the ESG strategy of the scheme.”


Holding long-term investments – why has my pension pot changed in value

Pensions, like any investment, carry some degree of risk. The value of your pension can go down as well as up. When considering these swings in value it’s important to think about your pension as a long-term investment.

Over the long term these swings in value usually iron out and return a profit.

History teaches

During the 2008-2009 stock market crash the FTSE 100 (the share index of the top 100 companies listed on the London Stock Exchange) struck its lowest point in March 2009. Yet it came roaring back during the following decade and struck all-time highs in May 2018.

But you don’t need to buy during a crash to benefit from stock market growth. Going back to the mid-1980s, if you’d invested a pound in the UK stock market on any given day and kept it there for 10 years, 99% of the time you’d have made money – on average more than doubling it. If you’d invested for only 1 year and taken your money out, you’d have lost money over a quarter of those times.

So, if you plan on remaining invested for a long time, don’t worry too much about the short-term ups and downs of the market. The main point is to stay invested over the long term, so your contributions have chance to grow.

If you still have concerns about your pension it may be beneficial to speak with a financial adviser. They usually charge a fee for their service so bear this in mind before seeking advice. Another option is to visit a website like MoneyHelper that provides free advice.

What are the benefits of a workplace pension?

Your workplace pension is a great way to save for your retirement:

  • All the contributions you and your employer make into your pension are tax-free
  • Pension funds invest in lots of different assets and this helps spread risk while still targeting long-term growth. For more information about what your fund(s) invest in please see our fund factsheets
  • The full state pension is only £179.60 per week (for the 2021/2022 tax year) so if you think you’ll need more money in retirement a workplace pension is a great investment

How do you define responsible investment?

Responsible investment is a phrase that has been thrust into the limelight in the last 12 months as more pension savers rightly become interested in how their money is invested.

But what does responsible investment actually mean?

At The People’s Pension, we have the dual responsibility of keeping savers’ money safe whilst generating positive returns – which of course must be further balanced against their own attitude to risk.

Our challenge is to determine how we invest member money in the types of industries and companies that they’re comfortable with, and still provide the type of growth needed to provide a meaningful return on their investment.

To be clear on the concerns our members have, we ask them. Over the last couple of years, we’ve run a survey asking them to rate the issues that matter most to them. Overwhelmingly, climate change came out as the most important topic, followed by controversial weapons.

So, if you know your customers’ primary concerns, how do you turn that sentiment into actionable change? Well, this question requires serious and careful consideration. For us, this means taking time to assess all issues thoroughly and taking a systematic and fact-based approach so we can make high-quality decisions on behalf of our customers.

This approach has seen us implement our first steps in ensuring our investment portfolio is aligned with our members’ wishes – we’ve completely excluded controversial weapons from our investment portfolio. This was a relatively straightforward decision to make and change to implement, as it had no material impact on the make-up and performance of our investment funds – so low risk and fuss free.

However, addressing climate change and how to travel down the road to net zero, requires rather more planning as it’s a very much more considered journey. We started in 2018, by adding a fund that reduces the carbon intensity of that part of our default funds. We acknowledge there is more to come, and from the mid-2020s we intend to use new contributions to smooth our transition to a net zero portfolio. This aims to balance the future risks of stranded assets against the current concentration risks caused by a relatively small number of net zero companies, as well as avoiding the potentially large transaction costs of having to sell significant assets in short time frames.

But there’s more to come. I’ll be at the Pensions Age Autumn Conference if you’re interested to hear more about our investment strategy and the further steps The People’s Pension plan to take on the route to net zero – look forward to seeing you there.

B&CE appoints new Investment Managing Director

Provider of The People’s Pension announces appointment

B&CE, provider of The People’s Pension1, has appointed a new Investment Managing Director to bolster its Investment Business Unit and enable the continued growth in scale and breadth of B&CE’s funds under management.

Jon Cunliffe, who has over 30 years’ experience in the finance industry will join B&CE in October. He joins from his role as Chief Investment Officer at wealth managers, Charles Stanley, with previous roles at Tesco Pension Investment, Aberdeen Asset Management and Bank of England.

Commenting on his appointment, he said:

“B&CE has an unrivalled reputation for providing first class workplace pensions solutions, which have provided good risk adjusted returns at a really competitive price.  Elsewhere, the support and customer service that clients receive are a cornerstone of its impressive growth trajectory. 

“After more than 30 years working in financial services, the opportunity to work for a fast growing, not for profit organisation, where there is a clear alignment of the interests of all stakeholders, is too good an opportunity to turn down.  I can’t wait to begin working with the team to establish B&CE’s position as the leading provider of workplace pensions.”

The People’s Pension, administered by B&CE, is the largest, independent master trust in the UK.

The new Managing Director for Investments will be responsible for the overall performance of the Investment Business Unit, working alongside the Chief Investment Officer who will retain responsibility for client investment strategy.

Welcoming the new hire, B&CE CEO Patrick Heath-Lay, said:

“It’s fantastic that Jon will be joining us. The growth of our investment activities, on behalf of our members, will be significant over the coming years and with the addition of Jon’s wealth of experience, these activities will continue to go from strength to strength.”


Interview: Our approach to investments

Your assets have almost doubled to £11bn in just two years. How are you managing such growth?

We invest in pooled funds. There are 17 of them, which are mostly life company pooled funds managed by State Street.

Essentially, we have a manager of manager-type structure. We use Northern Trust as a custodian to create multi-asset funds out of our portfolios, which is quite a scalable model.

Some of those flows you mentioned are obviously due to market returns with 2018 and 2019 being stellar years, but a lot of that, between £2.5bn and £3bn a year, are contributions.

We invest those contributions making sure that there are asset allocation tools to point those flows in exactly the right place.

The Covid pandemic is having a dramatic effect on the global economy. How is this affecting your scheme?

The biggest impact has been on the operational side. Before the pandemic, the team worked in an office five days a week, with Northern Trust and State Street attending meetings in person. But in March and into April we had to understand how to work in a home environment.

This involved organising things like having Bloomberg terminals in people’s homes, supporting our suppliers and just making sure that the control environment was not weakened.

My role is not just at The People’s Pension but also involves many other responsibilities for its parent company B&CE, some of which required wet ink signatures with managers. Moving a lot of our legacy processes, such as signatures, onto online processes was a big part of the challenge.

Operationally, the move into working from home was a big event and we certainly identified a lot of risks in the world of the unknown. These included the impact on markets. Will our funds still be able to price if markets close? Will central bank close markets for reasons of market panic? There are many other pieces of operational risks that we were tracking.

I know asset prices were not exactly smooth and orderly but there were a few big risks that we were focused on in terms of the markets. Some emerging markets were closed for periods and we were conscious of that.

On the investment side we are most concerned about currency risk. We are a long-term investor and so we understand that equities can be volatile, but they have probably been under-volatile for quite a period. March was probably more than we expected but it is part of a broader return to normality in terms of volatility.

We were focused on sterling’s precipitous decline in March. We have a derivative overlay for our currency hedging. That is how we hedge our US, European and Japanese exposures, so as sterling was falling we were conscious of the big negative cashflows that were coming. We had to do quite a lot of work to make sure those could be covered and that we would not be forced sellers at low points in the cycle.

But to some extent this reflects a welcome return of volatility. If I look at 2019, in September the fixed income fund outperformed a strongly performing equity fund. It is a crazy world. The first quarter was painful, but it was also more of a return to a textbook investing environment than we have seen for a while.

We aged a lot in March and into April, but it reminded us about getting back to the investment thesis.  

Over the past 10 years, passive funds have done well, whereas active funds have struggled to outperform. You predominantly invest in passive equities, so how will you fare in this new, volatile environment?

You have to remember that we are a growing fund. Our average member is far from retirement. Volatility for a 30-year-old means cheap assets in the long-run so the sell-off in equities in the context of their lifetime savings journey is not the worst thing ever. If we were a defined benefit scheme with a de-risking plan in place and saw our liability hedge suddenly rise, that could be dramatically more painful.

For those in the default and other lifestyle strategies, we transition over 15 years to fixed income from equities for members who are close to retirement. That journey worked well. People closer to retirement, certainly those at retirement, didn’t suffer losses during that period. If your retirement is five to 10 years away then there is time to recoup any losses, but these were quite minor.

Volatility in general can mean cheap assets and we have got fantastic pound cost averaging from members frequently contributing to the portfolio over the period.

On the broader question of active versus passive, it is still difficult to be an active manager in this market. I would not frame us as being a passive investor. Market cap is the lowest cost and simplest route to access a market but is not always the best. We have to justify the relatively substantial deviations that we make away from that. We have a multi-factor portfolio for about 20% for the portfolio. That is our most aggressive fund in terms of deviating from the market cap index, the holding is a bit less in the default fund which is around 15% to 16%. Then we have an adaptive cap portfolio where we essentially equal-weight to the mega-cap stocks from a market cap portfolio and invest the proceeds in smaller cap stocks. So, we have some reasonably substantial deviations from market capitalisation and most people wouldn’t see that as pure passive.

We see passive as one tool and do not think that anyone should just dive in there. Markets are clearly not efficient, but that is not to say that we have the secret source or the understanding of how to beat them.

The longer your time horizon, the more obvious certain trends could become, the more conviction you could have in them and the more competitive advantage you might be able to get from them. Take climate change. If we look to 2030 or 2050 will there be more carbon dioxide burnt by the economy or less? The answer is relatively obvious so we believe you could deliver a bit more value by tilting away from fossil fuels. Then it becomes a process of deciding how you do that, which is broadly where we are at this point.

We do not see ourselves as passive investors, we call it systematic investing. There are passive investors who blindly follow market capitalisation-based indices. They may well engage with their managers who manage those assets to ask them to exclude the lowest ESG scoring companies or engage with them. 

We do these things, but we do not leave it there. As an institutional investor who has a good sense of institutional values, understands its role in the value chain and can build an in-house resource which can kick the tyres of managers and the data, we think all of these activities will add value over the long term.

So, investing in passive funds would not mean blindly following the market capitalisation of indices?

We are on a journey. We started our conversation with the fact that our assets doubled in the past two years. We have to plot out the balance between us building a team in-house, how long it takes to do that, the activity we need to do before that and obviously the potential for additional costs. If you catch the wrong point in the cycle there you could just be adding costs without delivering returns and, to put it slightly tongue in cheek, then you are just an active manager.

So, we have to evolve at the right pace, with the right principles. But we think that if you are an institution who understands yourself and you have strong beliefs, then by expressing them in your portfolios, you should get a critical advantage over your passive player on that basis.

Has your rapid growth led to changes in the type of assets you are investing in?

Yes. We have some listed infrastructure in a multi-asset ETF. For property, we invest through a global REIT [real estate investment trust] index. We see those holdings as the future of where we would like to get to in more direct holdings, but that is beyond our complexity to deliver value from right now.

We have to recognise that due to auto-enrolment we serve a community of 90,000 employers in our scheme and there are a lot of administration costs that go with that. We do not have a huge investment budget compared to a defined benefit scheme and we have to include all of our costs in our charges. Obviously, that is important for investment decisions, we are not a net-return budgeter. We have to understand the full cost chain and that prevents us at this point from going directly into property or infrastructure until we get more scale.

We see those listed holdings as place holders. We know that we would like to do more but we need to have the scale and the right approach with the manager to make sure they understand it cannot be a two and 20 model when we would get into venture capital and private equity. That is not appropriate for our members. We are not sure if that is appropriate for any kind of member and we cannot hide it so we just will not accept those kind of fee deals.

For investments in property or private equity, we will also have to solve the valuation problem and make sure we are not giving away all profits to someone who has only been a member for a day while a person who suffered the past 10 years of costs retired yesterday. We need to make sure that valuation mechanisms are equitable between our members.

Let’s talk about risk management. You described your approach earlier as systematic. What does that mean in the context of the rapidly falling markets we saw earlier this year?

A lot of what we do on risk management is to think through problems in advance. We have re-balancing tolerances around our asset allocation. The consideration then becomes do you let the auto-pilot carry on or do you intervene?

A moment where we had to pause was when we came close to the asset allocation tolerances and sold bonds and bought equities around March 20. We sat there, looked at our numbers and engaged with our managers about liquidity in the bond market and asked ourselves if there was a reason why we would not allow this to happen? We came to the conclusion that this is why we put these rebalancing tolerances in place to begin with. We felt it was an appropriate decision when we set the asset allocation up and following that through felt like the right decision.

The FTSE100 was at 5,000 points back then and is now at around 6,000 so members have benefited from that re-balancing. About £300m was transferred into the market which felt like a big moment for us. So that was a case of the risk management in advance doing its job. Back in March, everything was happening. So, having the ability to go back to that blueprint and ask ourselves if this remained true was important.

Where we considered more strongly taking a different option was the sterling hedge, where a lot of things came together. Until various central bankers and the treasury had spoken, it was not clear if the UK would have a worse outcome than other nations. So, we kicked the tyres a bit more strongly on our original currency hedging hypothesis.

Essentially, you try and do two things, first assess whether this is a risk that is being rewarded, and we believe that currency risk is in the long run an unrewarded risk so you should just hedge it. Then there is an efficiency point. We hedge 70% of our portfolio. But if you think that there is a special insight you have where the market is way off and in theory you could be braver because there was reward in doing something differently. So as sterling went down to 1.12 against the dollar, that was quite far off the long-term valuations we were hearing from managers and we were seeing negative cash-flows coming out. That helped us endorse the long-term position of taking what felt like a loss and then making sure we were capturing some of the gains. But if it had kept making a loss, that would have been a different case study to explore.  

The long-term trajectory of the pound, say over 10 years, is difficult to predict.

Governments around the world have printed an unprecedented amount of money. Is this a competitive devaluation world? Is this a world where the country that does the least printing suddenly has an appreciation in their currency? Will it be tied into the dollar losing its exorbitant privilege of being the world’s global reserve currency? Does Brexit matter in terms of the trade deficit? 

There are a lot of things you could draw into a 10-year prognosis. Some of them will hinge on relatively leveraged events such as the US presidential election. 

You can tie yourselves in knots over these pieces of information, but we do not have the skills and expertise to do that work in house. We do not think this work is more important than asset allocation or long-term planning with the trustees around climate change, but the point where currency risk becomes more important is as the asset size grows. This might become something we could either take on or hire a more active manager, but right now we do not think that is where our governance priorities sit. 

You mentioned Brexit and have a relatively high allocation to UK equities. Are some of the risks priced in?

There are two things. One, we are a long-term investor so are not timing markets. Also, this is a UK workforce, most of whom will retire in the UK. We recognise our members are working for these companies. Investing in pound-denominated assets helps as well in terms of currency hedging. 

There are a number of different pieces here, but we need to explore the free movement of capital at some point. If I have a worker in the North East of England, we suck money out of his employer’s pocket. Why should that go exclusively to capital investments around the world?

We do not have much of a UK bias but there is a bit of a legacy of investing in market cap. I am not sure if the mega-cap or listed equity space is the right place to express that kind of UK bias. We should have a sense that this is UK money from UK employers which should go back into UK companies. That does not mean that we have to back individual companies or industries that are failing. We are not here to do bailouts of companies or industries that are struggling to exist in the future economy, but we need to have a sense that the UK is the place where this money came from and ultimately will go back to. 

How are you implementing responsible investment strategies across your scheme?

We see responsible investment as being three activities: investment, exclusion and engagement. First is investment, which is about taking data, asking ourselves whether a portfolio construction technique using it can add value and giving ourselves some belief and conviction in that. Ultimately, if we think that data in our portfolio construction technique can add value for members then we have to do it. Secondly, we may not have the data or the conviction but the topic itself might only affect a small number of companies, for example, controversial weapons, so we can exclude it. Thirdly, if we are exposed to an issue, then we should be engaging with companies on it. A passive investor would put that first because they feel obliged to hold every company in the index. There are companies where we fundamentally think that by not holding them, we can add value for our members. That does not mean engagement is less important, it just means we get a cleaner portfolio.

Looking at your largest 100 holdings, you are invested in a lot of oil companies. How are you engaging with them?

The difficult bit is that if you look at these big oil company names, a lot of them have some pretty big green energy holdings. A lot of the work we have done around climate change is analysing if we can get rid of these companies or would that have other detrimental effects? Adaptation scores or green energy scores shows that if you follow a strict exclusion approach towards these companies then you lose out a lot in terms of green technology.

The engagement process is about that challenge. If there are 100 fossil fuel stocks, then we will not need all of them in our portfolio. We can be more sophisticated than that. If you are more of a green energy company than a brown energy company then you are attractive to us. There is a way of saying to them: “This is where the line is. If you are close to the line, you probably would want to run faster. If you are on the wrong side of the line, then not only are we not going to hold your equity, but at some stage we are not going to refinance your bonds either.” It is with the cash, the liquidity financing, that probably the most impact comes we think. We want every company to understand the principles by which we invest, broadly that is the best way for them to understand why they got an investment. Over time we want to tie the bond finance to the equity finance and get most value from our engagement. 

What are The People’s Pension’s key targets over the medium term?

This is a governance journey for us. We now have £11bn in assets, in five years’ time we will probably be looking at £20bn to £30bn. Very few institutions of that scale were created in such a short period of time. That has pros and cons.

The cons are probably the pace of that, we need to grow our investment capabilities as rapidly as we can. The pros are that we do not have to go through all the mistakes other institutional investors have, we can probably get to the punchline a bit quicker and learn from them as much as possible.

We will be a lot more focused on tech and on the systematic focus, which was not available before, and all the while making sure that we understand how we add value and deliver that in a good governance environment. 

This interview was originally published on Portfolio Institutional in November 2020 and posted here with their permission.

The difference a charge makes to pension savings

For those of you not old enough to remember, there were days when the industry had charge caps of 1.5 per cent for the first 10 years and 1 per cent for the remainder of the life of a stakeholder policy. That’s up to twice the current cap of 0.75 per cent for default investments.

Of course, some of the reduction came as the result of political pressure, in the form of the auto-enrolment charge cap. But added to this was the entry of master trusts into the market, pooling the fixed costs of pension scheme provision over a much larger group of members.

This gave rise to a workplace pensions market that was more competitive and much cheaper.

So you might think not much more needs to be done with lowering charges. But you’d be wrong.

A fairer charge for all

The hard part in setting workplace pension charges is that costs, complexity and fairness trade off against each other. With all this in mind, we reshaped our annual management charge (AMC) last year to strike what we think is the right balance between these three things for our members.

The revised charge structure features an annual £2.50 cash charge, a management charge of 0.5 per annum and a rebate on some of the management charge.

The reason for change

When the AMC is calculated on a percentage basis only, it may result in a low charge rate but high pounds and pence figure for members with larger pots. Conversely, those with very small pots pay a fee that doesn’t cover the cost, or even the regulatory fees, of providing a pension pot.

In an environment where there are millions of small, deferred pension pots, common as a result of auto-enrolment, schemes may rely on members with larger funds to cross-subsidise the costs of managing the smaller pots. This is not a sustainable situation for a well-run scheme and this issue was a factor in the introduction of our annual £2.50 charge.

But we know there’s another underlying issue here – that of the growing number of small deferred pension pots. It’s why we’re working with the Department for Work and Pensions and others in the industry to bring forward a solution to the small pots problem.

Giving something back

As touched upon above, we also cut our annual management charge by means of a rebate which works to help boost members’ pension savings. As a member’s savings hit key milestones – £3,000, £10,000, £25,000 and £50,000, we apply a monthly rebate and automatically add money back into their pension savings. The level of rebate increases at each stage, reducing the impact the charge has on their savings and, in so doing, leaving more money invested for their future.

For someone with £15,000 in their pot, over the course of a typical year, £17 will be added to their pot, with this increasing the more they save for their retirement. This might not sound much to start with, but compound the rebates over the years and they could add a significant amount to an individual’s retirement savings – more than £14,000 for an average earner1.

Change is the only constant

Nothing stands still and further change is inevitable. We expect the workplace pensions market to become even more competitive with significant consolidation of both providers and pots. We expect the latter to be driven both by dashboards and, increasingly, by government encouraging the industry to automatically consolidate small dormant pots. This will create a tougher operating environment for providers but we expect the emergence of stronger providers with even greater scale leading to lower charges for members.

We’re not there yet but we’ve come a long way in the last 20 years. We hope that the next 20 see as much progress.

Keen to know more about our annual management charge and how members can receive a bigger rebate? Visit our member charge page for all the details.

  1. Assuming a member aged 35 with a starting fund of £15,000, a salary of £30,000 per year, paying 8 per cent gross contributions, based on qualifying earnings for the 20/21 financial year, investment returns of 5 per cent per annum, inflation of 2.5 cent per annum, and a retirement age of 68, this could add up to an extra £14,566.

A podcast on charges, defaults & responsible investment

10 million – that’s the success of auto-enrolment in numbers. 10 million people saving billions into a pension. But the job of pension providers and the government is far from being complete.

In this podcast with Hymans Robertson, I discuss what the DWP’s consultation on charges could bring for pension savers and give an insight into the latest activity from The People’s Pension in our members’ best interests.

Podcast highlights

  • Not-for-profit – what it means to be a master trust provided by B&CE, an organisation that’s for people and not profit.
  • Benefit of our new charging structure – the more our members save the lower their charge could be.
  • Our take on DWP’s consultation on charges – a potential solution to millions of cross-subsidised dormant pensions.
  • The importance of the default fund – our report, ‘Workplace defaults: Better member outcomes’ with State Street Global Advisors, depicts the behavioural biases and the common investment mistakes made by savers.
  • Our approach to responsible investment – the steps we’ve taken to ensure our investment funds reflect environmental, social and governance factors.
  • Support for our members and employers how we do things differently to other providers.

Listen to the podcast

Hear from me and host, Victoria Panormo, Senior DC Investment Consultant from Hymans Robertson in the podcast now:

Podcast: Hymans Robertson on… DC Master Trusts – The People’s Pension

Other reading

For more about our report, ‘Workplace defaults: Better member outcomes’ with State Street Global Advisors and our findings read my blog post:

Why default funds are the simple and sensible choice for most

Glenn Dobson is a former National Development Team Manager at B&CE, provider of The People’s Pension. He has been replaced by Phil Taylor.

Default funds – the simple & sensible choice for most

What do you think when you hear ‘default fund’? Look it up in the dictionary and it says ‘default’ means something that exists or happens if you don’t change it intentionally by performing an action.

It’s a shame something so positive has this label. Default funds are, in my opinion, the next success story after auto-enrolment – a well-governed default is the simplest path to achieving good returns. People lead busy lives, get overwhelmed by too much choice and complexity, and if left to their own devices may make poor decisions. The beauty of the well-governed default is that it’s simple for members. They don’t need to actively do anything to benefit from the default but, behind the scenes, there’s a huge amount of dedicated activity by experts in the complex world of investments.

And with 99.7% of savers in master trusts remaining in the default (according to the Pensions Policy Institute), it’s a part of the system I believe we should be celebrating as an industry.

Risks for DIY investors

A recent report by The People’s Pension and State Street Global Advisors highlights the risks for most people of taking investment matters into their own hands rather than staying in the default. ‘Workplace Defaults: Better Member Outcomes’ models potential outcomes from the most common mistakes DIY investors make with their pension savings and compares them with a typical default fund. Over 40 years the default investor amasses a pot of nearly £430,000. The DIY investors risk missing out on as much as £247,000 by switching out of the default.

  • Mistake 1 is chasing past performance – ‘Performance chasing Patricia’ buys high into a strong performing fund expecting it to continue to do well but sells when it falls, and she loses faith.
  • Mistake 2 is putting all your eggs in one basket – ‘Eggs in one basket Elliot’ fails to diversify his portfolio and invests in only UK funds.
  • Mistake 3 is not taking enough risk – ‘Cautious Connor’ doesn’t like taking risk so invests in a cash fund.
  • And finally mistake 4 is forgetting to take account of changing circumstances – ‘Forgetful Fiona’ is initially an active investor but as time goes by, she forgets to review her investments.

Default is not a last resort

I’ve spent my working life trying to demystify pensions, and I know that savers and employers alike crave things to be as simple as possible. It’s true there may still be a lot of complicated technical detail within the inner workings of pension schemes, investment funds and regulatory input. But that’s the point with a default fund. Dedicated experts whose job day in day out is to be specialists in this stuff take the necessary action to ensure a scheme is well run and investments are managed with great scrutiny, so that members don’t have to. A default isn’t a last resort. In well-governed master trusts, they represent a solution which is in the best interests of the vast majority – a lot of thought goes into it so that members who don’t have the time or the specialist knowledge can get better outcomes.

Add to that the tight regulation and governance assigned to master trust defaults, in particular, and it’s clear they are far more than just a back-up position for those who don’t engage with investment decisions.

We should celebrate a system which offers better outcomes for most members in a simple way without them having to make any difficult decisions. In a world where we’re so often faced with an overwhelming array of choices, it’s hugely reassuring.

Read more

Read the report, Workplace Defaults: Better Member Outcomes.

Glenn Dobson is a former National Development Team Manager at B&CE, provider of The People’s PensionHe has been replaced by Phil Taylor.