The DC pension charge cap should not be reduced below 0.75 per cent, and flat fees should be prohibited say leading consultancies.
Responding to the DWP consultation on the automatic enrolment charge cap, which closes today, LCP has called for an end to the practice of charging members flat monthly fees, arguing member borne flat fees are particularly detrimental to the low-paid and part-timers, the majority of whom are women.
The consultancy is also concerned that flat fees can erode the value of small pension pots, and can run the balance down to zero over time, creating reputational risk for the industry. Now: Pensions, which operates a flat fee, has confirmed to Corporate Adviser that some of its customers have seen their pots eroded to zero, although it has declined to say how many. The provider argues that a flat fee approach better reflects the cost of the service delivered to the customer. It argues that the general levy, which is charged to cover the cost of The Pensions Regulator (TPR), the Pensions Ombudsman Service and the Pensions Advisory Service (TPAS), costs more than a 0.75 per cent flat fee would generate from their pot.
LCP says the costs for the industry of running millions of small deferred pension pots could be reduced if DWP tackled the proliferation of small pots, and says the phased abolition of member borne flat fees should therefore be accompanied by new policies to ensure small pension pots are consolidated.
Barnett Waddingham says a reduction in the charge cap would lead to a restriction of choice and place too much emphasis on price over value. The consultancy also says transaction costs should not be included in the overall charge cap.
LCP agrees with this position, noting that in most cases these are actually very small and in many cases negative. It argues transactions which are in a member’s interests, such as during times of extreme market movements, could be hindered or prevented if an annual cap on transaction costs had already been reached; transaction costs cannot be known in advance; in particular, market movements can mean that transaction costs turn out to be higher (or lower) than expected when expressed as a percentage of asset values; this makes it hard for schemes, providers and asset managers to ensure compliance; and government is keen to encourage investment in more sophisticated strategies and illiquid assets, yet these strategies and asset classes tend to be associated with higher transaction costs.
A reduced charge cap would also reduce the potential for providers to offer value-added services to members, such as workplace roadshows say consultants. Consultants say that even with the present charge cap, market pressures have been leading to a downward pressure on charges without the need for further regulatory intervention.
LCP DC practice principal Stephen Budge says: “Charging structures need to be simple and fair to ensure the ongoing success of auto-enrolment, but flat fees bite hardest on those who can least afford them. If a lower paid worker sees the value of their pension savings significant declining each year due to fees this can send a negative message about future pension saving. It is well known that managing millions of small deferred pension pots is a burden to the industry, but that is a reason to tackle the issue of small pots rather than carry on with an unfair charging structure on individual savers.
“We also believe that reducing or including transaction costs in the charge cap could have negative impacts on members. Transaction costs in particular account for a tiny fraction of the costs of running a pension so capping them would make little difference to overall costs. Yet, the variability of these costs, which can only be calculated afterwards, could place restrictions on the ability of managers to trade which could seriously damage outcomes for members, especially in unusual market conditions of the sort we are currently experiencing. Many of the areas that the government is seeking to promote such as ESG investing and investing in illiquid assets tend to be associated with higher trading costs, and it is important that the DWP is joined up in its thinking on these issues”.
Barnett Waddingham partner Mark Futcher says: “In furthering the government’s aim of ensuring members continue to receive value for money and are protected from high or unfair charges, we do not think the cap should be lowered or extended to include transaction costs.
“Imposing a cap on transaction costs could negatively impact DC members with a number of undesirable consequences. Placing too much emphasis on ‘cost’ over ‘value’ could lead trustees to focus on simplified and less sophisticated investment strategies for fear of breaching the cap.
“Transaction costs are not the most material issues facing DC pension schemes, and introducing a cap would divert scarce trustee time away from other more beneficial developments like enhancing investment strategies using illiquid assets and making meaningful changes responding to the new ESG regulations.
“Lowering the cap will restrain the design of default strategies and restrict trustees’ ability to enhance their investment governance and meet coming requirements like climate change disclosures.
“Member value is also eroded by poor choices and a lack of products, services and support for retiring members. Pension freedoms have been around for more than 5 years but the industry has not yet caught up with the extra products, services and solutions needed. If the Government want to protect pension member outcomes then the next area to consider must be support for members at and through retirement.”
Aegon pensions director Steven Cameron, Pensions Director at Aegon says: “It’s appropriate for the DWP to review auto-enrolment charge caps and structures periodically, but delivering value for money and good member outcomes is about much more than simply driving charges lower. The FCA is currently consulting on a standard definition of Value for Money which in addition to charges, considers investments and service. We believe the focus should now be on improving those other aspects. Cutting the cap would remove the margin necessary to focus on ESG solutions, alternative investments including infrastructure and patient capital, digital engagement, personalised video communications or guidance support.
“Bringing transaction costs within the cap or limiting them separately could also do more harm than good. Transaction costs are different from other charges as they’re a necessary cost incurred from investing and higher costs can be beneficial if they improve investment returns. Making them subject to a cap could also stop the fund manager from transacting with potentially adverse consequence for investment performance. IGCs and trustees are already responsible for assessing the value for money of transaction costs and challenging any signs of excessive costs here.
“Competitive pricing already means medium and larger employers with stable workforces have charges far below the current cap. But minimum contribution schemes with high staff turnover are challenging for providers to run within the current charge cap and for them, a cut might mean having to spend time and money searching for another provider. They might find their choices limited to Nest which could see some members actually pay more in charges.”
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