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Briefing Note 64 - How do charges affect DC pension outcomes
Following the introduction of automatic enrolment, the majority of employees are expected to be saving into a Defined Contribution (DC) pension scheme. This is because over 80% of Defined Benefit (DB) schemes in the private sector are closed to new accruals or new members. Unlike members of DB schemes, members of DC schemes typically pay explicit charges to cover some or all of the costs of administering and running their pension.
The Government published a paper on 30 October 2013 to consult on the issue of charges. The paper proposes three options to cap pension charges for all members of default funds in qualifying DC schemes for automatic enrolment:
- A cap of 1% of the funds under management;
- a cap of 0.75%;
- a two-tier ‘comply and explain’ cap with a standard cap of 0.75%. A higher cap of 1% would be available to employers that explain to the regulator the need for a higher cap and why this is delivering a benefit to members.
This Briefing Note explains the different factors that may affect total savings in a DC scheme and how the impact of charges can be modelled into the future. It illustrates how the total pension savings of hypothetical individuals compare under different levels of charges. Finally, the note analyses how the different charging structures currently adopted by DC schemes will impact on those hypothetical individuals, and how combination charging structures compare against a scheme with a 0.75% charge on funds under management.
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