The most important factor identified by the PPI report was the contribution levels of members.
In recent years, the fees charged by pension schemes has come under much closer scrutiny. However, argues a new study by the Pensions Policy Institute (PPI), low fees are not necessarily the most important factor in determining the size of someone’s final pension pot.
According to the study, charging structures play an important role in determining the size of a pension pot. But, it says: “In order to secure improved outcomes, charges need to be considered alongside other factors such as contribution levels, investment strategies, member communications and experience, the strength of governance oversight and the impact of having multiple pots.”
Perhaps expectedly, the most important factor identified by the PPI report was the contribution levels of members. The study found that someone contributing an extra 2% of their salary on top of the legal minimum contribution would achieve a 25% increase In their retirement income, regardless of the charging structure of their pension scheme.
Another big risk to pensioners identified in the report is instances of multiple changes for those who have several pots. With the introduction of auto-enrolment, a growing number of savers are now likely to have multiple pension pots with the various employers they have had over their working life. This, the report says: “Can work against people achieving better results, as they can lose out by paying multiple charges across the accumulation period. Multiple pots can also mean that people are at risk from losing track of their pensions.”
To address this, the report suggests several potential reforms. For instance, the report says, a savers pension pot follow them throughout their career, with any new employer then contributing into the pre-existing pension scheme. Alternatively, the PPI suggests that the savings accrued in a previous pot could be transferred to the scheme provided by a saver’s new employer.
Nathan Long, senior analyst at Hargreaves Lansdown agrees with such an approach, noting: “A small tweak to the auto-enrolment rules could allow people who are already engaged with their pension provider to keep channelling monies to their preferred plan, a method that is highlighted in the report. When it is all boiled down a cheap pension which fails to help savers engage with their retirement planning is a bit of a false economy.