Defined contribution workplace pensions: The audit of charges and benefits in legacy schemes

The Independent Project Board (IPB) responsible for overseeing the audit of charges and benefits in legacy defined contribution (DC) workplace pension schemes has today issued its final report.

The IPB was asked to look at legacy schemes at risk of being exposed to charges over an equivalent of one percent annual management charge (AMC) and to recommend what actions need to be taken by the new Independent Governance Committees and Trustees. 

The audit delivers comprehensive data and analysis in a form which will enable governance bodies to focus on those savers most at risk.

The IPB is writing to the provider of each scheme where savers are potentially exposed to high charges and is recommending that providers should:

  • Review their data in the light of any actions already taken to reduce charges and any qualitative factors that might justify high charges;
  • Identify what actions could be taken to improve outcomes for savers and what actions can be taken to stop new savers joining poor value schemes;
  • Provide the data and any further analysis and proposed actions to the relevant governance body by the end of June 2015 at the latest.

The IPB sets out guidance for governance bodies which will have the task of evaluating whether the proposed actions are sufficient to ensure savers receive value for money in future. The IPB recommends that governance bodies agree remedial actions and an implementation plan with their provider by end December 2015 at the latest.

The IPB further recommends that the Department for Work and Pensions and the Financial Conduct Authority should jointly review industry-wide progress in remedying poor value schemes and publish a report by the end of 2016.

Carol Sergeant, Chair of the Independent Project Board said:

"This audit is the first comprehensive and systematic analysis of the impact of charges in the DC workplace pension market, with a particular emphasis on historic workplace pension schemes. It has highlighted the importance of understanding the  impact of scheme design on individual savers and has  shown that there is no "one size fits all" charge structure that will ensure all savers get value for money all of the time.

"The comprehensive data set and the wide range of scenarios we have used in the analysis will help governance bodies to determine whether their scheme members are receiving value for money and will enable them to recommend changes to providers where they are not.

"The challenge now is for providers and governance bodies to work together under the watchful eyes of the regulators and bring about the necessary changes, so that savers who are not in automatic enrolment schemes can benefit from modern standards and value for money outcomes."

The audit follows from the Office of Fair Trading's September 2013 study of the DC workplace pensions market. That market study found that old (pre 2001) and other high charging contract and bundled-trust pension schemes may not be achieving value for money by the standards of modern defined contribution workplace pension schemes. However the OFT did not have enough information to be able to fully assess the charges.

To address this, the OFT agreed that the Association of British Insurers (ABI) and its members would undertake an audit of these schemes which was overseen by an Independent Project Board (IPB).

The IPB has collected a comprehensive set of data on charges and benefits from providers. This has allowed them to quantify what the future impact of charges will be on different types of saver, depending on their decisions and actions and the characteristics of the scheme they are in.

Based on this information, the IPB has determined the current amount of savings where charges could have a high impact on savers in the future. The key findings of the audit are:

  • Of the £67.5bn assets under management (AUM) in-scope, £42bn have charges of less than 1% in all scenarios, including “worst case” scenarios.
  • Between £23.2bn and £25.8bn of AUM is potentially exposed to charges of above 1%. Around half of this is potentially exposed to charges above 1.5%; between £5.6bn and £8.0bn is potentially exposed to charges above 2%; and around £0.9bn is potentially exposed to charges above 3%.
  • Schemes where savers are potentially exposed to the very highest charges are more likely to have complex charge structures. Nearly all AUM potentially exposed to charges of over 3% are in schemes with monthly fees or deductions from contributions. 
  • The majority of the AUM exposed to charges over 3% (£0.7bn out of £0.9bn) is held by savers with pots of less than £10k. Of this, over 90% is held by savers that are paid-up and have stopped contributing.  For such savers the impact of monthly fees can result in a very high impact of charges.
  • We estimate that there are 407,000 savers that have joined schemes in the last 3 years who could be exposed to a charge of over 1% in the future. Of these, 178,000 could be exposed to charges over 2% and 22,000 to charges over 3%.
  • There is around £3.4bn of AUM with potential exit charges of 10% if savers leave their scheme today. Of this, £0.8bn is held by savers over age 55, who will be eligible to withdraw their pension savings from April 2015.


For press enquiries please contact:

IPB Press Office: [email protected]
Direct: +44 (0) 20 7936 0528 / +44 (0) 20 7842 0147

Joe Williams: [email protected]
Direct: +44 (0) 20 7936 0528
Mobile: +44 (0) 7730 751292

Monomita Raksit: [email protected]
Direct: +44 (0) 20 7842 0147

Notes for editors

  1. The IPB consists of representatives from DWP, the regulators, industry bodies and consumer representatives and has an independent Chair.  The Chair is Carol Sergeant, who previously led a government review into simple financial products and has held senior roles at the Bank of England, the Financial Services Authority and Lloyds Banking Group. The full list of members is:
    • Carol Sergeant, Independent Chair
    • Charlotte Clark, Director, Private Pensions, Department for Work and Pensions
    • Nick Poyntz-Wright, Director of Long-term Savings and Pensions, Financial Conduct Authority
    • Ed Smith, Head of Banking, Lending & Protection, Financial Conduct Authority (until September 2014 Ed was Project/Inquiry Director, Competition and Markets Authority)
    • Jon Riley, Project/Inquiry Director, Competition and Markets Authority
    • Andrew Warwick-Thompson, Executive Director of DC and Public Service Pensions, The Pensions Regulator
    • Doug Taylor, Independent Consumer Expert
    • Michelle Cracknell, Chief Executive, The Pensions Advisory Service
    • Joanne Segars, Chief Executive, National Association of Pension Funds Limited
    • David Hare, Immediate Past President, Institute and Faculty of Actuaries
    • Otto Thoresen, Director General, Association of British Insurers
  2. The full report.
  3. The audit was conducted by Frontier Economics, working under the direction of the IPB and directly accountable to the independent chair of the IPB. The board of each contributing provider was required to attest in writing to the accuracy and completeness of the data submitted.
  4. Governance bodies are Independent Governance Committees (IGCs) for contract-based schemes, and trustee boards for trust-based schemes. The FCA is currently consulting on the rules that will establish IGCs, and the requirement for providers to establish and maintain an IGC will come into force in April 2015.
  5. The audit has used the reduction in yield (RIY) to measure the impact of scheme charges. The RIY includes all member borne charges expressed as a percentage point reduction in the annualised return over a year. It is an industry-standard measure that can be used to compare different schemes. Specifically, it can be compared with other benchmarks such as the 0.75 percent of fund charges used by the DWP for its price cap, or an AMC that includes all member borne charges.