UK - US and Danish pensions industry experts have warned the UK's Personal Accounts Delivery Authority (PADA) against developing individual defined contribution pensions plans at a cost of no more than 30bps.
Speaking at the National Association of Pension Funds (NAPF) conference in Edinburgh, Scotland, Todd Ruppert, chief executive of US pension plan provider T.Rowe Price Global Investment Services, told delegates placing the emphasis of personal accounts design mainly on cost could seriously damage investment returns for investors.
"If there is a premis to give individuals as much [income] as possible in retirement, starting with the premis of focusing on driving down costs is not the appropriate mechanism. You are not going to get talented active managers to participate. You'll get the cheap option but it doesn't work," said Ruppert.
His comments followed a question from NAPF chief executive Joanne Segars asking how services in the US and Denmark would deliver comprehensive pensions services, containing all aspects of investment management, administration, governance, regulation and communication, for just 30 basis points - an idea floated by Lord Turner in his review of the UK pension industry when he proposed the launch of personal pensions accounts for individuals.
Ruppert revealed in an earlier presentation the ‘target date retirement plans' now being taken up US corporate sponsors and their members carry costs of anything between 55bp and 72bp, to give individuals tailored defined contribution plans meeting their age and lifestyle needs, the communications support to accompany it as well as the investment strategy required to give them a sufficient income at retirement.
Similarly, Torben Mogen Pedersen, managing director of PensionDanmark, added the investment cost to his plan comes in at approximately 45bps which is achieved through economies of scale, but the primary emphasis on this is to achieve a net rate of return rather than look first at cost.
The Danish government is now scrutinising pension funds and requiring schemes to disclose individual pensions fees, to encourage greater competition and transparency.
Pedersen told IPE while PensionDanmark's own fee is said to be highest among industry-wide pension funds, schemes provided by insurance companies are generating fees at least give or six times higher.
Data from the US reveals the average sum attained over the lifetime of a pension is currently $59,000 (€50,000), but there are approximately 10 types of investor each plan sponsor has to consider, from the young new joiner to the retired individual seeking to draw down assets.
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