Active Member Discounts

The Government recently released further information on its plans to cap Annual Management Charges at 0.75%, and also remove Active Member Discounts, from the list of charges that providers have sometimes levied on our personal pensions upon stopping regular contributions.

To elaborate, the base charge providers use to administer our pensions and investments is called an Annual Management Charge (AMC) which is taken from our pension investments. Typically this can range from anything as low as 0.10% to as high as 2.00% a year, but for most of the new employer schemes I’ve seen installed in the last few years, it has been between 0.35% and 0.75%.

The Active Member Discount mechanism was generally added to employer schemes where providers would agree to provide a ‘low’ AMC for those members who paid pension contributions regularly, in exchange for being able to increase the AMC to those who stopped. Usually the charge would double, for the last such pension I had from an employer it went from 0.35% whilst I was there making contributions, to 0.70% when I left and stopped.

So good news for you and me, the Government is getting rid of that possible trap and capping our costs going forward!

Now that I’ve finished today’s educational piece, I can’t resist playing devil’s advocate here.

Considering the Government’s desire to get us all saving more for our retirement, is there a case for saying they’ve lost a good incentive, by removing the scope for this Active Member Discount mechanism?

Let’s put it in the context of another ongoing concern of the Government, the state of the nation’s physical health.

Now what if the gym, which insists you sign up for an annual membership, instead of charging me a fixed monthly fee, charged me less if I went to the gym regularly, and more for the days when I didn’t.

The more I went, the less I’d pay, and hopefully (although not guaranteed, if I just sat in the Sauna), the fitter and healthier I’d be.

Of course, the less I went, the more I’d pay, and I may have to accept I will no longer look this trim.

Wouldn’t this be a good incentive to get off the sofa and go to the gym to get fit?

Back to reality and unfortunately Active Member Discounts for pensions didn’t have this effect. They weren’t conceived as an incentive, or particularly marketed in this way. Members were told about them when they started the plan, but generally had forgotten by the time they had left, or had stopped making contributions. And where they didn’t necessarily think about the plan again, possibly suffered unwittingly.

Undoubtedly losing this particular mechanism is a victory for the consumer, removing a potential pitfall for the less engaged investor.

As the auto enrolment legislation takes effect, fortunately many of us will continue to make regular contributions throughout our working lives now without rest. The need or place for any such mechanism, potential incentive or not, has seemingly gone, and is probably best left consigned to history.

Charles Goodman

Consultant

Telephone: +44 (0)20 7893 3972

Email:  contactus[@]broadstoneltd.co.uk