Transaction costs will remain excluded from the charge cap and administration charges will be banned for pots under £100, the Government has confirmed.
Its Review of the Default Fund Charge Cap and Standardised Cost Disclosure published today confirms that the charge cap will remain unchanged at 0.75 per cent.
Eight per cent of respondents to the Government’s consultation were in favour of extending the scope of the cap to include transaction costs. Those in favour felt that there was sufficient headroom to allow for innovation and that having all member borne costs under one cap would provide greater transparency and a level playing field for members.
But 76 per cent felt that the disadvantages outweighed any potential benefit for members. Those against the cap highlighted concerns around complexities in fund administration, reduced headroom, restricted investment strategies, stifling of innovation and lack of flexibility to react to changing market conditions.
The Government said it accepted there are circumstances where headroom gives schemes the financial flexibility to develop ideas and react to unpredictable market conditions such as Covid-19. It also felt it essential that asset managers have the ability to make the right investment choices for their scheme members and are able to use the tools at their disposal to manage volatility risks. The Government is also keen to encourage investments in illiquids and other alternative assets. Bringing transaction costs and the associated additional complexity into the cap could deter schemes from investing in such classes of assets, it argued, thereby restricting innovation and potentially yielding poorer outcomes for members.
Just 3 per cent of consultation respondents called for a reduction in the level of the charge cap.
The Government had previously stated that it would consider consulting on the use of secondary legislation to encourage the use of Cost Transparency Initiative (CTI) disclosure templates, but says it wants to give the templates a chance to succeed.
Some respondents felt that the DC workplace pensions template (DCPT) is working well and that mandating for the use of the CTI would create unnecessary burden for providers.
Around 22 of respondents believe that legislative intervention would be required to improve transparency and consistency in the reporting process. The Government concluded that it would keep a watching brief and could in future legislate to mandate the use of CTI templates if uptake is poor.
Pensions minister Guy Opperman says: “The evidence from the Pension Charges Survey 2020 is that the Charge Cap at 0.75 per cent remains the right level and for that reason I will not be making changes at this time.
“I am committed to limiting the erosion of the value of small pots, where flat fee charges risk depleting deferred pots to zero.
“Nobody should be automatically enrolled, only to find their hard-earned pension savings significantly reduced by charges. Therefore, I will be introducing a minimum level initially set at £100, before a flat fee element of a charging structure can be applied to these pots.
“I remain committed to improving transparency and standardisation of costs disclosure information. Costs transparency initiative (CTI) templates were introduced in 2019 and the call for evidence showed support for improving disclosure and increasing uptake of the CTI templates. Given the importance of transparency for pension savers and in line with the Work and Pensions Select Committee recommendations1, I will closely monitor the adoption of the CTI templates, and we will look to introduce legislation in the future should we not see satisfactory levels of voluntary take-up.”
Now: Pensions CEO Patrick Luthi says: “The announcement by Government that small pension pots worth less than £100 should not be charged administration fees is an important step in the maturing of the pensions landscape, and one which NOW: Pensions will support in the forthcoming consultation.
“Implementation of the change will need careful thought and communication to employers and members.
“Importantly, the advice to members really does not change. Modern employment patterns are more dynamic and will create lots of small, deferred workplace pension pots, and the best thing to do is to consolidate them together to form a single, more manageable pension plan.
“Consumers should be aware that often the best value home to consolidate your multiple pots will be one of your existing workplace pensions. ”
PLSA director policy and advocacy Nigel Peaple says: “We are pleased to see the level and composition of the 0.75 per cent defined contribution pension charge cap retained following DWP’s review. The cap is an important consumer protection, ensuring savers receive better value for money from their pensions, though in practice most DC schemes’ are already offering great value to their members by offering default funds that operate well below the cap.
“Setting a minimum balance of £100 below which flat administration fees cannot be applied will protect the pension savings of workers with the lowest pension balances but a longer term solution to the small pots issue must be developed. It is important the government continues to consult with the industry on this issue via the Small Pots Working Group as well as on future increases to flat fee balance minimums to deliver a successful automatic enrolment market that works for all savers.
“We are also pleased to see DWP recognise the success of the Cost Transparency Initiative, the industry standard for investment cost data developed by the Pensions and Lifetime Savings Association (PLSA), the Investment Association (IA) and the Local Government Pension Scheme (LGPS) Advisory Board. There has been widespread take-up among asset owners and we encourage all pension schemes to adopt the standard.”
The Pensions Regulator executive director of regulatory policy, analysis and advice David Fairs says: “All defined contribution pension savers deserve to be in a well-run scheme that offers value for members.
“We support the Department of Work and Pensions’ plans to introduce a limit on pension pots below which flat fee charges cannot be levied.
“This proposal will help reduce the erosion of members’ pensions by fees and, along with wider action recommended by the Small Pots Working Group, protect the benefits of savers with small pots.
“We also welcome plans to monitor take up of the cost transparency initiative templates. Transparency of costs and charges information is an important factor in helping savers achieve good retirement outcomes.”
LCP senior consultant Tim Box says: “The decision to prevent flat fees being charged for the smallest of pension pots created under automatic enrolment makes sense, especially given the large number of small ‘stranded’ pension pots. The recent DWP Small Pots Working Group report found that 25 per cent of deferred pots in a survey of five of the largest DC pension providers are less than £100 this decision will benefit literally millions of pension savers. However, over time a better solution would be to make sure that very small pots get consolidated into larger pots, and DWP needs to drive forward in this area.
“We also believe it is sensible to keep the charge cap at the existing level of 0.75 per cent. The Pension Charges Survey 2020 shows the average charge across all members of qualifying schemes is 0.48 per cent – significantly below the current charge cap. This shows that providers have been working hard to reduce costs for commercial reasons but keeping the cap at 0.75 per cent retains scope for providers to offer innovative investment solutions (such as in illiquid assets) which may cost more but are likely to deliver better member outcomes in the long-term.
“Finally, we are relieved that transaction costs are not to be included within the charge cap at this time. This is a pragmatic decision that will avoid additional complication in the charge cap calculations.”
Smart Pension director of policy Darren Philp says: “We welcome the outcome of this consultation which limits the impacts of flat fees on members with the smallest pots. The introduction of the de minimis at £100 is consistent with what we currently have in place for our members and strikes a sensible balance between protecting the member and provider sustainability. The application of the de minimis to active members will need a lot of thought as it could be operationally complex as well as inconsistent with other industry charging practices, and we look forward to picking up on these issues during any consultation on the implementation.”
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