DC charges: Are fiduciaries
too fixated on cost?
Data crunch: Scheme sponsors are thinking of ‘value’ as more than a low-cost option for savers and hence are taking a more balanced approach when selecting providers
Annual member charges in the UK defined contribution landscape have been on a downward path for many years. Even before the imposition of the 75 basis points charge cap in 2015 — which was designed to ensure savers were protected from unfair fees and was maintained after a government consultation in 2020 — costs were already shrinking.
In 2020, we estimated that the average AMC on a member-weighted basis was 39bp, well below the requirement.
Although masked by the average, there is still significant variation in charges between different governance structures and scheme sizes, with members of smaller trust-based schemes facing the highest charges.
Several factors drive fee compression
Beyond the cap itself, which has resulted in a change in mindset, fee compression has been motivated by several considerations.
Investments is one area. DC schemes have a much greater propensity than other segments of UK pensions to invest in passive products, where costs are typically a fraction of their active counterparts. Active equities, for instance, are a rare component in UK DC defaults.
Scale is another issue. As the market has grown, particularly in the master trust segment, members have concentrated on schemes that have considerable economies of scale, reducing investment and administration costs alike.
And finally, competition. As new providers have entered the UK DC market, they have pitched for business at significantly below the prevailing market rate. These aggressive pricing strategies are born of the desire to achieve scale rapidly and have encouraged others to follow suit.
But the question remains, is a low-cost pension necessarily one that is good value for money? Are trustees and other DC fiduciaries too fixated on cost?
Broadridge survey evidence reveals that sponsors are thinking about ‘value’ as more than simply the lowest cost option.
When asked about whether they care more about cost or quality, scheme sponsors for the most part suggested they focus on quality or take a more balanced approach when selecting providers.
Slow transition into value factors
While this shows promise, the transition to a more holistic interpretation of value is still in its early days, with many providers claiming to be hamstrung by too much focus on cost.
But its evolution is essential to the development of one key facet of DC pensions: the inclusion of illiquid and private markets in DC investment portfolios.
Accessing these asset classes is notoriously expensive, but integrating them into a broader multi-asset framework allows member charges to be kept down.
Other issues surrounding minimum investment size and the appropriate management of liquidity, can both be remedied through scale, which the DC landscape is rapidly accumulating.
Covid-19 and the ensuing turbulence has stressed the importance of diversification: scheme fiduciaries may increasingly see the value of alternative investments and be willing to pay the price for access.
Doing so should lead to pensions that are not just low cost, but better value for savers.
Hal La Thangue is an associate director of global insights at Broadridge Analytics Solutions