Financial regulators target ‘value for money’ in defined contribution pensions

Tom Selby
16 September 2021
  • The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) have launched a joint discussion paper on value for money in defined contribution (DC) pensions
  • Regulators want to make it easier to compare value for money between different pension schemes
  • Metrics will focus on costs and charges, investment performance, and governance – including data quality and communications
  • How paying just 0.5% more in charges could cost you £10,000 in lost retirement income

Tom Selby, head of retirement policy at AJ Bell, comments:

“There are few policy issues in financial services as important as ensuring defined contribution pension savers get good value for money from their retirement pot.

“This is particularly the case in the workplace pensions market, where the pension scheme is chosen by the employer on behalf of the member. SIPPs, on the other hand, are chosen actively by individuals.

“The areas of focus set out by the regulators today are absolutely the right ones, with costs and charges front-and-centre.

“While there are other elements to value for money, including investment performance and member communications, the amount contributed to a pension and the amount paid in costs and charges are the two things people can control.

“If the new value for money metrics proposed by the FCA and TPR helps to drive down prices and increase standards across the retirement market, that can only be a good thing for savers.”

The impact of charges

“Take for example two basic-rate taxpayers – John and Jill - who each contribute £2,000 a year into a pension, with tax relief of £500 added on automatically.

“Both enjoy 4% per annum investment returns, but while John pays 1% in total charges, Jill pays just 0.5%.

“After 30 years, John’s fund has grown to around £116,000, while Jill’s retirement pot is worth over £126,000.

“In short, by paying just 0.5 percentage points more in costs and charges John has ended up with £10,000 less in his pension.”

Tom Selby
Head of Retirement Policy

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

Contact details

Mobile: 07702 858 234
Email: tom.selby@ajbell.co.uk

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