14 July 2009 – Publication of DWP research reports no. 591 and 592 enabling retirement savings programme directorate

Current practices in the workplace personal pension market: Qualitative research with pension providers and intermediaries

Pensions industry responses to the workplace pension reforms: Qualitative research with pension providers and intermediaries

Today, the Department for Work and Pensions publishes the findings of research exploring current practices in the workplace personal pensions market and industry attitudes, and likely responses to the workplace pension reforms set out in the 2008 Pensions Act.

The reports present findings from in-depth interviews with 16 of the top 20 providers in the UK, along with 28 intermediaries including employee benefit consultants.  All interviews were carried out with senior decision makers in the organisations. This research was carried out between July 2008 and August 2008 on behalf of the Department for Work and Pensions by RS Consulting.

The main findings in 'Current practices in the workplace personal pensions market: Qualitative research with pension providers and intermediaries' are:

Charge structures and levels

• Looking at the current picture, providers feel the stakeholder pension (SHP) scheme charge cap 'forced' the rest of the workplace personal pension (WPP) market to adopt the same charging structure and levels in order to compete. As a result group personal pensions (GPPs) and group SHPs tend to use a single annual management charge (AMC) model.
• The AMC is set by the provider and covers most costs. AMCs tend to range from 0.8% to 1.0% of the value of the fund annually where this covers intermediary commission. If the employer pays the intermediary via a fee, then the AMC can be lower: 0.4% to 0.6%. However, the lowest AMCs are charged only to the most profitable employers.
• Providers can vary the AMC depending on a range of factors but particularly how profitable the employer is seen to be. Factors used to judge this include size of organisation, participation levels, age profile of employers, staff turnover and others.
• There were occasional variations on the basic AMC model. For example in some circumstances providers may charge a higher rate initially, which lowers over time (known as 'dual AMCs'). Some also offer 'active member discounts', where people paying into the scheme pay a lower charge than those whose membership is dormant.

Investment funds

• Internal fund management charges were typically included in the AMC, but externally managed funds could incur additional charges (typically ranging between 0.5% - 2.5% of the value of the fund annually).
• GPPs provide access to a wider range of funds than SHPs (typically 50-350 funds, compared to 20-100) although members tend to be steered towards a more limited selection, chosen by employers with guidance from intermediaries. Most employers agree a default fund ¹ with their intermediary, and this typically offers some form of lifestyling ². The lifestyling process varies depending on the degree of active management.

Group Self-invested Personal Pensions

• The group self-invested personal pension (SIPP) market is relatively new, and most providers in this study did not offer them. There is a far wider range of charges applicable to group SIPPs, reflecting the range and complexity of investment options available.
• Charges are mostly levied by the provider and paid by the individual, from the fund. Most other charges are applied as a flat fee for services they choose to take up, not in proportion to the fund value.

The main findings in 'Pensions industry responses to the workplace pension reforms: Qualitative research with pension providers and intermediaries' are:

• The providers and intermediaries interviewed are at an early stage in their planning, but generally had a good understanding of the reforms and were able to think through potential strategies in response to the reforms.
• Respondents primarily focussed on the workplace personal pensions market, as they think the occupational market will be largely unaffected by the reforms.

The potential impact of the workplace pension reforms

• Providers are positive about the idea of automatic enrolment, which they think will boost the number of people saving for retirement. However, some felt that overall saving may not increase, due to concerns around employers “levelling down” contributions.
• There were also concerns that automatic enrolment could present an administrative burden to providers, if they experience increased member numbers but with low contribution levels and high member churn.
• Providers recognised that the personal accounts scheme is designed to complement existing provision, not to replace it. Nevertheless there was some concern about competing with the scheme on charging.
• Providers are concerned that low charges in the personal accounts scheme may have a downward pressure on charges, and hence profitability, across the WPP market. This continues a trend they feel was introduced by the introduction of the SHP charges cap, which they feel led to competition forcing charges across the market to below 1% and standardisation on an annual management charge basis.

Possible responses to the workplace pension reforms

• There is no evidence from this research to suggest that providers see the reforms as an opportunity to expand their business in relation to WPPs, and no evidence that they plan to compete with the personal accounts scheme for the same segments of the market.
• Some predict that low charge levels may end intermediary commission at the "lower end" of the market, and therefore reduce advice available to this segment (where intermediaries do not currently earn fees).
• Both providers and intermediaries therefore think they will focus on the most profitable segments of the market, and look at the development of product features in WPPs, to ‘add value’ beyond the services offered by the personal accounts scheme.
• Many providers feel they cannot start to change their business strategies until the details of the reforms are finalised, in particular the charging structure and levels in the personal accounts scheme, along with confirmation of the contribution limits and transfer ban in the personal accounts scheme, as this will inform their planning.

Notes to Editors

1. DWP Research Report No. 591 – "Current practices in the workplace personal pension market: Qualitative research with pension providers and intermediaries" is published on 30 June 2009 by Corporate Document Services. The research was conducted on behalf of DWP by Andrew Wood, John Leston and Marisa Robertson from RS Consulting.
2. DWP Research Report No. 592 – "Pensions industry responses to the workplace pension reforms: Qualitative research with pension providers and intermediaries" is published on 30 June 2009 by Corporate Document Services. The research was conducted on behalf of DWP by Andrew Wood, John Leston and Marisa Robertson from RS Consulting.
3. Free summaries are available from Paul Noakes at the DWP Social Research Branch (Adelphi, 1-11 John Adam Street, London WC2N 6HT). The reports and summaries are available free on the DWP website http://www.dwp.gov.uk/asd/asd5
4. The research involved in-depth interviews with 16 of the top 20 UK providers by market share and with 28 intermediaries, comprising employee benefit consultants and independent financial advisors across a range of sizes.

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Footnotes

1. The default fund is the pre-assigned fund or funds into which a member’s contributions are invested if no decision is made by the individual regarding the funds they wish their contributions to be invested in.

2. A lifestyle fund is an investment fund that automatically switches investments from more risky assets into less risky assets as the member approaches retirement.