Standard Note: Last updated: Author: Section SN 6209 6 September 2012 Djuna Thurley Business and Transport Section
Pension scheme charges can be for good quality financial advice and other services that may be a beneficial product feature. However, even quite small differences in charges can make a significant difference to the size of an individual’s pension pot at retirement. The issue has taken on added importance with the impending introduction of workplace pension reforms from October 2012. An important part of these reforms is the introduction of the National Employment Savings Trust (NEST), a low-cost national pension savings scheme. However, employers also have the option of using an existing scheme, provided it is a “qualifying scheme” which meets certain minimum requirements and standards. Qualifying schemes are required to a default option, so that individuals are not required to make an investment choice. DWP guidance says care should be taken to ensure charges are not excessive and are clearly disclosed. The Government has the power to establish a charge cap for qualifying schemes, should this prove necessary. The industry is working on measures to improve transparency. This note looks at the different charges that apply, the impact they can, the regulatory framework and measures considered by the Government to mitigate the impact of charges on pension savings.
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1 Background 1.1 Charging structures 1.2 Definitions 1.3 Levels Variation across schemes Variation between countries 1.4 Impact 2 Regulation The Pensions Regulator The FSA 3 4 5 Issues with the current system Planned action by the industry Workplace Pension Reforms 5.1 Stakeholder pensions 5.2 Auto-enrolment and NEST NEST charges Charges in ‘qualifying schemes’ 2 3 3 5 5 7 8 10 12 13 15 18 21 21 22 24 25
There are two main types of pension scheme: a defined benefit (DB) scheme typically promises to pay a pension linked to salary and length of service and a defined contribution (DC) scheme which: [...] provides pension scheme benefits based on the contributions invested, the returns received on that investment (minus any charges incurred) and the rate at which the final pension fund is annuitised. 1
DC schemes are sometimes referred to as money purchase schemes. They can be individual arrangements i.e: personal pensions or stakeholder pensions. (A stakeholder pension is a personal pension that must meet certain legislative conditions, including a cap on annual management charges). Employer DC provision can be either: - Workplace-personal pensions which are contract-based and include group personal pension plans (where employees of a particular employer participate in a personal pension scheme on a grouped basis) and group stakeholder pensions; or
DWP, Preparing for automatic enrolment – Response to the call for evidence, June 2011, Glossary
- Occupational schemes, which are sponsored by the employer and are trust-based (i.e. run by trustees nominated by the employer and/or members). 2 The introduction of automatic enrolment from October 2012 is expected to result in 5 to 8 million people “newly...